CfllCA^o/II. REPORT ON THE / INVESTIGATION OP THE CHICAGO TELEPHONE COMPANY. COMMITTEE ON GAS, OIL AND ELECTRIC LIGHT HON. ANTON J. CERMAK, CHAIRMAN BY EDWARD W. BEMIS REPORT ON THE INVESTIGATION OF THE CHICAGO TELEPHONE COMPANY SUBMITTED TO THE COMMITTEE ON GAS, OIL AND ELECTRIC LIGHT HON. ANTON J. CERMAK, CHAIRMAN BY EDWARD W. BEMIS TABLE OF CONTENTS. Letter of Transmittal , 7 Introduction 8 Territory Covered 9 Previous Investigations 9 Some Contracts with Other Companies 10 The Problem Before Us 11 Gross Earnings, Expenses and Profits 13 Operating Expenses 14 Payment to the American Telephone and Telegraph Company 15 Maintenance and Depreciation Eeserve 18 Decline in Maintenance 19 Similar Tendencies in St. Louis 21 Changes in the Art 21 Long Life Property, Proportion of : 24 Depreciation Reserve of the Company 25 The Appraisal 26 Copper 27 Overhead 28 Land 29 Land, Base and Overhead 30 Paving 31 Working Capital 33 Plant Development, Cost of 33 Development of Business, Cost of 34 Early Profits 35 Present Value 36 Life 36 Depreciated or Present Value 38 Methods of Building Up a Depreciation Reserve 40 Maintenance and Depreciation in Other Bell Companies 41 Rate of Return 44 Possibilities of Reduction 46 Toll Earnings and Expenses 48 Municipal Requirements The Subway 48 Depreciation, Extraordinary 49 Office Buildings and Equipments, Displacement of 52 Semi-Mechanical Switchboards 53 Extraordinary Depreciation, Conclusions on 54 Ordinance of 1907, Results of 54 Improvements in the Service 55 City Telephone Bureau 55 Measured Service for Residences 56 Meters 56 Conclusions 37 Statement of Prof. Bemis 100 Present Value of the Property 101 Comparison of Recorded Costs with New Appraisal 101 Rental to A. T. & T. Co 103 Maintenance 104 Past Profit and Charges 106 Proposed Ordinance 107 Reduction in Rates and Charges 107 Summary of Reductions 110 Increase in Wages Ill Summary of Wages, Pensions and Disability Benefits 115 Meters 116 The Telephone Bureau 116 LIST OF TABLES. Table. Page. 1. Expenses and Profits since 1890 13 2. Percentage of Expenses and Profits to Investment 14 3. Kentals to American Telephone and Telegraph Company 17 4 Depreciable Property and Percentage for Maintenance 19 5 Declining Ratio of Maintenance to Investment 20 6. Repairs and Reconstruction 1903 21 7. Appraised Value New 26 8. Copper since 1892 27 9. Overhead, Summary of 29 10. Land Appraisal and Cost 30 11. Land, Base and Overhead 30 12. Rejected Items and Conceded Value 36 13. Life 37 14. Salvage 37 15. Annual Depreciation 38 16. Present or Depreciated Value 38 17. Maintenance and Depreciation of Bell Companies, including Long Dis- tance 42 18. Maintenance, Depreciation and Investment of Bell Companies, aside from Long Distance 43 19. Expenses and Profits Within City, Revised 48 20. Earnings and Telephones since 1904 55 21. Declining Rate of Return, with Additional Bonds 58 LIST OF APPENDICES. Appendix. Page. 1. Balance Sheets since 1880 59 2. Appraisal, Chicago and Suburban 66 3. Appraisal, City 68 4. Cost of Property New, City and Suburban 5. Growth of Plant 71 6. Plant and Cost Statistics: A. Underground Conduit 72 B. Underground Cable and Wire 73 C. Underground Conduit and Cable 73 D. Central Office and Subscribers' Station Kquipment 74 E. Total Equipment and Stations 74 F. Maintenance since 1890 75 G. Conduit and Wire since 1883 75 H. Wire and Stations since 1883 76 7. Base Figures vs. Book Value 77 8. Base, Overhead and Total Appraisal 80 9. Buildings, Appraisal vs. Book Value 83 10. Defense of Building Appraisal, by J. G. Wray 84 11. Subway Construction, Effect of (According to J. G. Wray) 87 12. Growth of Investment and How Paid For 90 13. Depreciation, How Treated by Company 91 14. Maintenance and Addition to Reserve, in City, 1908-12 93 15. Composite Life, Salvage and Annual Depreciation 94 16. Quantities According to Inventory, City and Suburbs 95 17. Chart Illustrating Decline in Maintenance 97 18. City Purchase, Provisions of Ordinance 98 COMMITTEE on GAS, OIL AND ELECTRIC LIGHT of the CITY COUNCIL OF THE CITY OF CHICAGO Aid. ANTON J. CERMAK, Chairman. Aid. JOSEPH F. BYAN, Aid. JOHN P. STEWART, Aid. THEODORE K. LONG, Aid. JAMES B. BOWLER, Aid. EUGENE BLOCK, Aid. JACOB A. HEY, Aid. FRANK VAVRICEK, Aid. JOHN HADERLEIN, Aid. ALBERT W. BEILFUSS, Aid. CHARLES TWIGG, Aid. LEWIS D. SITTS, Aid. FELIX JANOVSKY, Aid. STANLEY S. WALKOWIAK, Aid. JAMES A. KEARNS. City Hall, Chicago, Oct. 25, 1912. Alderman Anton J. Cermak, Chairman Committee on Gas, Oil and Electric Light of the City Council, Chicago, 111. Dear Sir: I herewith transmit the results of my studies of the Chicago Telephone Com- pany, so far as they relate to the ability of the Company to reduce rates or im- prove the service. Until the Committee shall decide upon the wisdom of my recommendations upon these matters, an apportionment of the total amount of reduction in rates to the various classes of service need not be made. Invaluable assistance has been rendered from the beginning to the present time by the accounting firm of Marwick, Mitchell, Peat & Co., and particularly by the head of the Chicago branch, Mr. James Hall, and his assistant, Mr. Andrew Sangster. Their work not only appears in the special report which they submitted to me some time ago, and which is herewith transmitted to the Committee, but in the constant assistance they have rendered in following out, at my suggestion, spe- cial lines of inquiry into the accounts of the Company. In the large amount of investigation which has been necessary in the prep- aration of this report, the Chicago Telephone Company has fully co-operated. The ordinance of November 6, 1907, gives the City access to the plants and accounts of the Company. But the officials have gone farther than this, and have assisted in working out data and in making investigations requested by the City's representa- tives. Very respectfully submitted, / EDWAED W. BEMIS. Introduction. The regulation of telephone rates in large cities by any public body is prac- tically a virgin field. Aside from the action of the Chicago City Council, Novem- ber 6, 1907, fixing the rates now charged in Chicago, there have been only two notable studies of the subject in this country. One in 1909-10 by the Massachu- setts Highway Commission for Boston and its suburbs, and one in 1911 by the Maryland Public Service Commission, for the City of Baltimore. There have been, to be sure, several investigations of the telephone rates in smaller places, by the Wisconsin Eailroad Commission and the New Jersey Public Utilities Commission, but they have little direct bearing upon Chicago conditions. The same lack of application to conditions here applies to an investigatian in Los Angeles and one in Seattle, in each of which cities there are two competing com- panies of substantially equal size. No court or commission has thus far brought together such tabulated com- parisons of operating expenses, construction costs, etc., per unit or telephone plant or of service rendered, as is the case with gas, electric light and street railways. This has been partly due to the rapid growth of the telephone business and partly to the reliance hitherto upon competition in most sections outside of New England, rather than upon public regulation. With the tendency of late to division of territory between the Bell Company and the independent companies, the need of information to serve as a basis for public regulation is now seriously felt. Furthermore, the relations of local Bell companies to the American Telephone and Telegraph Company, hereafter to be referred to by its usual abbrevaition, the A. T. & T., are so close that it is difficult to study local conditions without the help of the National government as to the facts with regard to the parent com- pany, whose business is nation wide. Fortunately, the power to secure this in- formation has just been granted to the Interstate Commerce Commission, but it will take time to secure results from this source. In Europe and Australia the telephones are so largely owned by the national governments, and conditions are so different from here, that little help can be secured in that direction. All this, together with the magnitude of the interests at stake, make the Chicago investigation difficult. We have here to deal with the second largest telephone company in the world. Only New York has more telephones than Chi- cago. Contrast the 251,614 'phones in Chicago, January 1, 1912, with the 220,781 in London, 85,961 in Paris and 133,860 in Berlin, at the same time, and with the 453,000 in Greater New York, of which number 326,122 were in the Borough of Manhattan. According to the United States Consular Reports for 1912 (page 357), the entire number of telephones taken over by the British Government on January 1 from the National Telephone Company was only 560,000 for all of Great Britain and Ireland, or only 72% more than were operated by the Chicago Telephone Company in the city and suburban district, and only 2% times the number within the city limits. The number of telephones throughout Canada in 1911, according to the 'United States Consular Report from March 28, 1912, was only 302,759, or less than in Chicago and its suburbs. The American Telephone and Telegraph Company gives the following as the number of telephones (partly estimated) in various countries, January 1, 1912. The number in use by the Chicago Telephone Company in the city and suburbs is given for comparison: Chicago Telephone Company 335,652 Canada 335,000 West Indies 17,000 South America 120,000 Australasia 124,000 Oceanica 17,000 Asia 166,000 Africa 41,000 Europe 3,239,000 All the world outside the United States, Europe and Canada is reported as having only 517,000 'phones, or less than twice the number in the Chicago district. , Territory Covered. The Chicago Telephone Company embraces two divisions, the city and the suburban. The city division, with a population of 2,1 Ho, 283 in 1910, covers the area of the city, which since July 17, 1911, has been 194.4 square miles. The sub- urba/n division, with a population of 656,65;") in 1910, embraces 5,194 square miles, extending fully 100 miles along the lake and from 30 to 60 miles back from the lake. Thus the Company, covering 388 square miles, embraces, Lake, Cook, Mc- Henry, Kane, Du Page, Kendall, Grundy and Will Counties in Illinois, and Lake and Porter Counties in Indiana. It includes Elgin, Aurora and Joliet, 111.; Gary and Valparaiso, Ind., and toll lines to Kenosha and Lake Geneva, Wis. There are 33 exchanges in the city and 95 in the suburban division; 25 of those in the city are of the central battery type, with a capacity of 4,900 to 10,50(> subscribers. Of the exchanges in the suburbs, 23 are of the same type, averaging a capacity of about 4,900 subscribers. There are in the city eight local battery type offices, often called magneto offices, and 72 in suburban districts; they average only 200 subscribers. Conditions in every way are quite different in the city and* suburban district; in the former the wires are mostly in underground conduits r .while in the latter they are in overhead cables or are bare wire on poles. In the city a large part of the service is on a measured basis; in the suburbs it is on a flat rate basis, such as is common in small cities and rural communities. The reve- nues and expenses, naturally, differ in these two sections. The city has jurisdic- tion only of the rates and services within the city, and special attention, there- fore, must be given to that part of the business of the Company. Since, however, it is one company in both city and suburbs, and since it is impossible to separate entirely the two branches, it is well to begin with a study of the Company as a whole and then take up the city division. Previous Investigations. Three investigations of the Chicago Telephone Company have been made. The first, covering substantially a year, under the auspices of the Committee on Gas, Oil and Electric Light of the City Council, aided by the telephone engineers, Messrs. D. C. Jackson, W. H. Crumb and G. W. Wilder, ended with the passage by the City Council of the telephone ordinance of November 6, 1907, under which the Company is now operating. The second investigation concluded May 9, 1910, was by Messrs. D. C. and W. B. Jackson, engineers, and Messrs. Young fe Com- pany, accountants, for the year ending March 31, 1910. This was made to the City Comptroller, Mr. W. H. Wilson, and was a supplement to a report they had already made, December 30, 1908, outlining a plan of accounting for the Tele- phone Company. The report of May 9, 1910, was considered by the Committee on Gas, Oil and Electric Light, in. various sessions, from May 19 to June 2, 1910. The fact that the accountants employed were also accountants for the Telephone Company led the Committee to vote on June 2d that other experts should be em- ployed to go over the report. On June 16, 1910, the Committee on Gas, Oil and Electric Light were informed by its sub-committee that Mr. W. J. Hagenah, of Madison, Wis., had been engaged To do this work. From January 5 to January 23, 1911, the Committee considered Mr. Hagenah 's report covering the calendar year 1909. To enable Mr. Hagenah to report on the changes in each of the several classes of rates that could be wisely made in connection with a total reduction of about $200,000, the Committee, -on January 23, took a recess. The consideration of the finaJ report of Mr. Hagenah, dated May 2, 1911, was postponed until after the consideration of the gas ordinance. Immediately there- after, on July 17th, the undersigned was asked to take up the investigation. A prior engagement caused more or less of delay, until it finally seemed wise to include not only the prosperous experience of the Company in 1910, under 4;he reduced rates of the 1907 ordinance, but also to include the rapid growth of the Company and its continued prosperity in 1911. It also developed, near the close of 1911, that the Company, in the summer of 1911, had undertaken an expensive and exhaustive inventory and appraisal of all its property. It was so evidently unwise to ignore such an appraisal that no apology need be made for delaying the 10 report until the Company was able, August 17, 1912, to place the entire results of this valuation at the disposal of the City, and until those results could be given the consideration which their importance and bulk, in nine large volumes, demanded. According to the Jackson-Young report, the existing rates yielded only 3.83% on the investment. After paying 5% interest on the bonds and 8% dividends on the stock, properly applicable to the investment within the city limits, there was, if the report be accepted, a deficit for March 31, 1909-10, on business within the city limits, of $908,533.52. These figures were based upon the theory of the investigators that the Company was not allowing a sufficient amount for deprecia- tion. The Company had spent $622,296 that year on reconstruction and replace- ments. The investigators considered that the depreciation for the year was in excess of this amount by $956,626.20. In his final report, for May 2, 1911, page 64, Mr. Hagenah estimated that the Company, after paying interest on its bonds and 8% on the balance of what he considered its depreciated investment within the city limits, would have had a surplus in 1909 of $309,488.36. When the Committee on Gas, Oil and Electric Light were considering sub- stantially these figures, on January 23, 1911, and were about to make a motion to reduce the rates charged by about $216,000, or about 2% of the gross receipts, the other $100,000 of surplus being considered as needed by the Company for emergencies, Mr. B. E. Sunny, President of the Chicago Telephone Company, said: "An attempt to distribute that amount, $216,000, would be futile, first, be- cause the amount is wholly erroneous; second, that it would give the Telephone Company rates which would be unreasonable and which it could not accept. * * * There is no chance in the world of the Telephone Company being able to accept rates on the basis suggested." The Committee voted, however, as follows: "That Mr. Hagenah be instructed to proceed with the preparation of the schedule of telephone rates on the analysis contained in the report made to the Committee, and that he reduce the rates to the extent of the surplus, of approxi- mately $216,000, where his cost analysis shows the present schedule to be excessive or inequitable, and that the said schedule of telephone rates be reported back to this Committee for its future action." Mr. Hagenah held that the plant had depreciated 22.5% and must set aside yearly $2,717,890 within the city for maintenance and to meet depreciation, or 13.65% of the then value and 11.61% of the book cost of the property, including land and working capital. In this situation, with Mr. Hagenah basing the possibility of a reduction of $216,000 upon the assertion of an amount of depreciation which President Sunny denied, it became exceedingly important to have the fullest access to the books of the Company throughout its history, and to study the appraisal just completed for the Company by Messrs. Byllesby and Arnold. Some Contracts with Other Companies. The Chicago Telephone Company differs from many other public utilities in several very important respects: 1. The Company has not only thrown open all of its books and other accounts and plants to the inspection of the City's representatives, as contemplated in the ordinance of 1907, but it has freely given much other valuable material and assistance which it was under less obligation to .furnish. Inquiries which called for considerable investigation were much more promptly and fully answered than is customary, or than could have been legally demanded. There has been no evidence of an attempt to keep back anything that was asked for relative to the Company. 2. There have been no fires, suspicious or otherwise, to destroy the early records of the Company. 3. There has been no change of ownership to complicate the situation. One company, and that one always controlled by the A. T. & T. Co., has been in charge 11 since the first consolidation in 1881, two years after the beginning of the tele- phone business in Chicago. 4. There has been no telephone competition in the city since 1880, with the exception of the thus far negligible competition of the Chicago Tunnel Company. 5. There were no early losses or failure to pay both development costs and good dividends out of the revenues of the Company from the very start. 6. While there have been increases of plant out of earnings and increases of stock to represent this new plant, without direct payment at the time in cash by the stockholders, the par value of the outstanding stocks, bonds and notes has rarely exceeded, and on January 1, 1912, did not exceed, the present value of the physical assets of the Company. In other words, water, in the sense of the excess of outstanding securities above tangible assets, does not appear in the stock of the Company. 7. A depreciation reserve of about $5,000,000, or over 15% of the outstanding- stocks and bonds, has been accumulated out of earnings to meet depreciation, and. has been invested in extensions. Some of these points will be enlarged upon elsewhere. It is sufficient now to congratulate the Chicago Telephone Company upon its unique position in combining so many good features. The investigation of the profits and the regulation of rates are made far less difficult by the above situation. On the other hand, because of the great size of the Company, with over $35,000,000 of assets, and with a service touching most closely the homes and comfort and business of the entire city, and because of the novelty and com- plexity of the problems to be handled, there is call for the most thorough investigation and the most judicial thought that can be brought to the task. The revenues of all the gas, water and telephone properties controlled by the Wisconsin Kailroad Commission are no greater than those of the Chicago Tele- phone Company. The Problem Before Us. The problem before us arises from the ordinance of November 6, 1907, giving a franchise to the Chicago Telephone Company until January 8, 1929. It provided, with reference to that portion of the Company's business within the city limits, a complete control by the City Council of rates for periods of five years each, after the expiration of the first thirty months. The rates for the first two and one-half years were prescribed in the ordinance of 1907. Since the City Council has not prescribed new rates since 1907, those ordered for the first thirty months, ending in April, 1910, have continued. The full provisions of the city ordinance of November 6, 1907, on this point are here quoted: ' ' 7. Future Kate Eegulation Special Ordinance Eight Keserved Consent of Company. ' ' The City Council, as one of the conditions of the grant of the privileges herein conferred upon the Chicago Telephone Company, hereby reserves to itself the right from time to time during the period of this grant, by special ordinance amendatory hereof, to hereafter establish, fix, prescribe and regulate the rates, charges, prices and tolls, or other compensation or any limitations thereupon, for each and every kind of service, facilities and equipment which the Chicago Tele- phone Company furnishes or supplies, or may furnish or supply, in the City of Chicago, un'der this ordinance, and also the basis, method, manner and means of computing, exacting, imposing, paying and collecting such rates, charges, prices and tolls, or other compensation of said Chicago Telephone Company. ' ' Included in the right or rights above reserved to the City Council is the right to hereafter alter, change or reduce the maximum rates for any service, facilities or equipment hereinbefore described, and any other rates, charges, prices, tolls or compensation for any service, facilities or equipment which may now or here- after under this ordinance be established, fixed, prescribed, imposed or collected by said grantee, as the City Council may deem expedient and reasonable, and to pass, by a special amendatory ordinance, from time to time, all reasonable rules 12 and regulations relative to the rates, charges, prices, tolls or other compensation of said grantee, for any service, facilities or equipment. The Chicago Telephone Company, by the filing of the acceptance of the terms and conditions of this ordinance hereinafter provided for, shall be understood as expressly consenting and agreeing to promptly accept, adopt, put into effect and operate its system of wires, cables, electrical conductors, poles and conduits, in the City of Chicago under any reasonable schedule or schedules of rates, charges, prices, tolls or com- pensation for telephone service, instruments, facilities or equipment, or for all or any of them, or any reasonable schedule or schedules of limitations upon such rates, charges, prices, tolls or compensation, or any reasonable rules and regulations relating thereto, and also the basis, method, manner and means of computing, exacting, imposing, paying and collecting such rates, charges, prices and tolls, or other compensation of said Chicago Telephone Company, which the City of Chicago may, by special amendatory ordinances, establish, fix or prescribe from time to time, after the expiration of thirty months from the time this ordinance goes into force and effect, and any reasonable schedule or schedules of rates, charges, prices, tolls, or other compensation for any other service, instruments, facilities or equipment, other than those herein mentioned, or for all or any of them, or any reasonable schedule or schedules of limitations upon such other rates, charges, prices, tolls or compensation, or all or any of them, or any reasonable rules and regulations relative thereto, which the City of Chicago may, by special ordinance, establish, fix or prescribe from time to time after this ordinance goes into force and effect. Provided, that any schedule or schedules of rates, charges, prices, tolls or compensation or of limitations thereupon, which are established, fixed or prescribed as aforesaid shall not be fixed by the City of Chicago to continue for a period of more than, or of less than, five years, unless at the time of the passage of any such special amendatory ordinance the unexpired term of this grant is less than five years. "Whenever the City desires to take up the regulation of rates as hereinbefore provided for, the Comptroller shall give to the Chicago Telephone Company at least thirty days' notice, and shall require the Company to produce, and the Company shall produce, all the facts, data and information in its possession which the City may require to assist the City to make a proper and reasonable regulation of rates. "If at any time said Chicago Telephone Company shall in any way contest or deny the reasonableness of any rates, charges, prices, tolls or other compensa- tion, or any limitation or limitations thereupon, for any kind of service, facilities or equipment prescribed by a special amendatory ordinance, as hereinabove pro- vided, or by a general ordinance as hereinafter provided, and pending the deter- mination of any proceeding, litigation or contest whatever, shall collect or receive rates, charges, prices, tolls or other compensation in excess of the rates, charges, prices, tolls or other compensation, or any limitation or limitations thereupon fixed by ordinance, said Chicago Telephone Company shall upon the final deter- mination of any such proceeding, litigation or contest repay to each and all of its lessees, subscribers and patrons the excessive amount which it has collected or received therefrom, together with interest thereon at the rate of five per cent. (5%) pe r annum from the date of said collection or receipt unless the unreason- ableness of the rates, charges, prices, tolls or other compensation, or any limita- tion or limitations thereupon, which have been attacked, shall have been estab- lished. "Eight of Kegulation by General Ordinance Eeserved. "Nothing in this ordinance contained shall be construed or taken as prevent- ing the City of Chicago whenever it shall be empowered by the General Assembly so to do from passing from time to time any general ordinance or ordinances establishing, fixing, prescribing or regulating the rates, rentals or charges of tele- phone companies for any service, instruments, facilities, equipment or licensing, regulating or taxing telephone companies, it being the intention of this ordi- nance that the City of Chicago shall in no way surrender any right it may now have or may hereafter acquire to tax, license or regulate telephone companies or to establish, fix, prescribe or regulate the price, rates, rentals, charges or compensation to be charged for telephones, or any service, facilites or equip- ment; provided, also, that nothing in this ordinance contained shall be construed as preventing the City of Chicago from granting an ordinance to any other 13 telephone company. The Chicago Telephone Company by the acceptance of this ordinance shall be understood as agreeing to comply with the terms and condi- tions of any reasonable, general ordinance or ordinances passed as aforesaid." Evidently the first question to be determined is the amount of profit that the Company has made during the four years of operation of the existing ordinance, and the ratio of that profit to the actual investment in the property. Other questions will follow, such as the relation of investment to present value, the amount needed for depreciation, the reasonable rate of return, prospects of future profits and costs as affected by possible competition, the building of sub- ways, etc. Gross Earnings, Expenses and Profits. In the following tables are presented the actual receipts and the actual expenditures as shown by the books of the Company since 1890. Allowances for depreciation and other reserves not actually expended are omitted. The account- ants have made a few minor adjustments of the books in the table below, but only one is of sufficient importance to deserve mention, and that is of not any large importance. Unusual expenditures of 1911 of $144,583.92 on account of the appraisal and $44,453.40 in connection with a strike, or a total of $189,037.32, were in large part thrown back and apportioned over the last seven years, thus making the burden less severe in 1911. The investment in Table 2 is based on the cost reported by the Company on its books without any deductions for depreciation. TABLE 1. EXPENSES AND PROFITS, CITY AND SUBUKBAN. Before Making Additions to the Depreciation Reserves. Yr. Ended Dec. 31. Earnings. Expenses. Miscellaneous Net Earnings. Revenue. Net Profit. 1891 $ 1,036,569.19 $ 597,469.90 $ 439,099.29 $ 3,689.45 $ 442,788.74 1892 1,194,715.58 738,184.30 456,531.28 4,093.15 460,624.43 1893 1,417,829.73 881,451.53 536,378.20 536,378.20 1894 1,479,878.85 902,057.02 577,821.83 2,950.94 580,772.77 1895 1,616,028.79 1,036,396.64 579,632.15 18,931.87 598,564.02 1896 1,797,567.17 1,059,164.00 738,403.17 22,237.51 760,640.68 1897 1,908,615.11 1,039,169.47 869,445.64 18,869.85 888,315.49 1898 2,137,609.48 1,210,214.17 927,395.31 16,089.70 943,485.01 1899 2,480,184.12 1,477,596.99 1,002,587.13 17,930.53 1,020,517.66 1900 2,870,489.44 2,065,021.19 805,468.2* 21,214.84 826,683.09 1901 3,484,130.95 2,197,770.28 1,286,360.67 27,226.89 1,313,587.56 1902 4,290,950.99 2,781,390.23 1,509,560.76 27,868.21 1,537,428.97 1903 5,308,201.13 3,495,831.06 1,812,370.07 45,315.03 1,857,685.10 1904 6,265,124.57 3,602,428.85 2,662,695.72 59,730.39 2,722,426.11 1905 7,016,057.39 4,346,963.09 2,669,094.30 42,149.07 2,711,243.37 1906 7,810,293.54 4,920,422.46 2,889,871.08 52,181.51 2,942,052.59 1907 8,635,102.08 6,621,059.09 2,014,042.99 56,703.06 2,070,746.05 1908 8,617,238.09 6,642,647.95 1,974,590.14 81,768.37 2,056,358.51 1909 9,745,954.46 7,238,688.52 2,507,265.94 54,589.07 2,561,855.01 1910 . 11,092,879.07 7,824,205.70 3,268,673.37 42,934.01 3,311,607.38 1911 12,474,022.15 8,836,827.49 3,637,194.66 43,540.78 3,680,735.44 14 TABLE 2. PEE CENT. EARNINGS, EXPENSES AND NET RETURN TO AVERAGE INVESTMENT, ELIMINATING ALLOWANCE FOR DEPRECIATION. City and Suburban. Calendar Year. Total Telephone Earnings. Expenses of Operation. Net Telephone Earnings. Miscel- laneous Revenue. Net Return to average Investment. 1891 51.01% 29.40% 21.61% .18% 21.79% 1892 42.11 26.02 16.09 .14 16.23 1893 38.23 23.77 14.46 14.46 1894 35.83 21.84 13.99 .07 14.06 1895 36.52 23.42 13.10 .43 13.53 1896 37.42 22.05 15.37 .46 15.83 1897 36.92 20.10 16.82 .37 17.19 1898 37.61 21.29 16.32 .28 16.60 1899 36.68 21.85 14.83 .27 15.10 1900 34.39 24.74 9.65 .25 9.90 1901 33.59 21.19 12.40 .27 12.67 1902 33.17 21.50 11.67 .22 11.89 1903 34.54 22.74 11.80 .29 12.09 1904 36.77 21.14 15.63 .35 15.98 1905 37.77 23.40 14.37 .23 14.60 1906 36.67 23.10 13.57 .25 13.82 1907 33.90 26.00 7.90 .22 8.12 1908 29.77 22.95 6.82 .28 7.10 1909 31.40 23.32 8.08 .17 8.25 1910 33.13 23.37 9.76 .13 9.89 1911 33.53 23.76 9.77 .12 9.89 City. 1908 31.91% 25.21% 6.70% .31% 7.01% 1909 33.39 25.34 8.05 .15 8.20 1910 35.00 25.16 9.84 .13 9.97 1911 35.38 25.58 9.80 .13 9.93 Operating Expenses. No conclusions can be drawn from the tables just given until a study is made of the operating expenses, investment and reasonable allowance for depreciation. Operating expenses will be first considered. Of the total average expenditures for operation and new construction in 1911 of about $13,183,339.79, of which $8,836,827.49 was for operation, the payroll amounted to $6,332,485 and taxes to $720,000. There is no evidence that these expenses can be materially reduced. Expenditures this year in the department of station removals and changes are falling, but on the whole the upward trend of wages found in other industries has affected and will still continue to affect the telephone business. In a report of the United States Department of Commerce and Labor to the Senate, February 23, 1910, upon telephone companies (61st Congress, 2d Session, Document No. 380), it is shown (page 94) that outside of Colorado and further west, Chicago was paying higher monthly wages to its operators than in most other cities. The total number of employes in 1907 6,843 had an average monthly pay- roll of $43,97. The 8,475 employes in 1911 had an average payroll of $51.31. 15 While the number of employes had increased 23.8%, the monthly payroll had increased 44.5%. Of more interest, perhaps, are the figures for the traffic department, con- taining the operators who handle all the messages. These increased from 4,090 in 1907, with an average monthly wage of $31.17, to 5,116 in 1911, with an average monthly wage of $35.23. The average pay per employe increased 13%. The pay for an eight-hour day for an ordinary operator doing no Sunday or holiday work rises from $23.84 a month during the first six months of employ- ment" to $39 the last half of the third year, and by successive steps to $49.86 the tenth year. Higher wages are given to supervisors, whose pay gradually increases to $56.36 a month in the seventh year. Plans are now being considered for a pension scheme in all the Bell companies, which will add somewhat to the expenses of the Company. Further increase of wages, with increased cost of living and the increase of wages elsewhere, are also likely during the next five years. Since the Company, however, has successfully met previous increases and seems to be doing quite as well by its employes as do other telephone companies, there does not appear to be any reason for giving further consideration to the subject at the present time. The Chicago Telephone Company spends more money per telephone than do other large Bell companies in operators' wages, schooling, rest and lunch room expenses. In this respect the cost per telephone in Chicago last year was $1.87 greater than the average of all the Bell companies, and $1.40 greater than in the seaboard states from Maine to Virginia. To what extent this excess of expenses in the traffic department is due to the large number of nickel 'phones and the extent of the flat rate service, and to what extent it is due to better wages and greater interest in the welfare of the employes, it has been found impossible to determine. Certain it is that the welfare work, such as rest and lunch rooms, schooling, etc., among the employes is carried much farther in Chicago than in most, and probably than in any other places. The yearly expense here is 73 cents a telephone for these purposes, as com- pared with 31 cents on the average, for the country as a whole, and 41 cents on the average for New England and the other seaboard states north of the Potomac. Practically all supplies and materials for construction, outside of buildings, are obtained from the Western Electric Company. Since the majority of its stock is owned by the A. T. & T., which also owns over 95% of the stock of the Chicago Telephone Company, there is naturally some suspicion of the prices paid by the local company. Investigation elsewhere, as well as studies that it has been possible to make in preparation of this report, have not confirmed these suspicions. At least, so far as the present report is concerned, this particular matter may be omitted from further consideration. Two other expenses, aside from those of the traffic department, are materially greater in Chicago than elsewhere. One of these is the expense from station removals and changes, and the other is the expense for repairs. The considerable percentage of the population of Chicago which moves every year, and the extent to which the cheaper type of telephone, the nickel 'phone, has been extended, are supposed to account for the difference in expenses with regard to station removals, which average over $2 per telephone. The larger cost of repairs in Chicago than elsewhere probably has a tendency to keep down the need for renewals and will be considered further in connection with the subject of depreciation. Payment to the A. T. & T. The operating expenses thus far considered were higher, in some respects, than in other companies, but have a sufficient justification to warrant our accept- ance of the same in this report. Very different in character is the yearly payment by the local company, in common with every other Bell Company, of 4%% of its gross receipts from telephones to the A. T. & T. Co., a company, it must be remembered, which, by 16 its ownership of the majority of the stock of these various companies, stands at both ends of the bargain. The more, however, that the right hand the A. T. & T. Co. decides that its left hand the Chicago Telephone Company shall pay, in the form of a percentage of the gross receipts, the higher must be the charges against the subscriber, to pay this disguised dividend. The payment made by the Chicago Telephone Company in 1911, of $537,585.12, amounted to $1.69 for each of the 318,135 telephones, often called stations, in use on the average, during the year. It was equivalent to 1.45% of the average investment of $37,194,587.95. (Hall's Report, pages 4, 36-9.) The payment for the City portion of the business was $445,550.42 and will doubtless be about $500,000 in 1912. In return for this payment, the Chicago company receives three advantages: First, the rental, with all repairs and renewals, of the electrical portion of the subscribers' equipment, the transmitter, receiver and induction coil; second, certain patents; and third, legal, accounting and engineering assistance from time to time. These points will be considered in the above order: 1. TRANSMITTER, RECEIVER AND INDUCTION COIL: The Western Electric Company, which makes these instruments, has refused the writer's request for information on their cost, or the cost of maintenance and renewals. The Kellogg Switchboard Company, of Chicago, claims to sell an equally good set for $2.80, with a reduction of 15% if brought even in small lots, in connection with the bell, cord, stand and other small parts that go with a desk or wall outfit. If the price, under these circumstances, and with the discount, is only $2.38, it may fairly be presumed that the cost, with a fair profit to the Western Electric, which supplies all these parts for over 4,000,000 telephones, must be below this figure. For our present purposes, one needs to know not only the cost new, and the fact that about one-fourth of the number are yearly returned by the Chicago Telephone Company for some repairs, but also the cost of these repairs, and the life of the instrument as a whole. In the refusal of the Western Electric to give this information, we may fall back upon the fact that on September 6, 1907, the Chicago Telephone Company met the bids of independent companies for the sale of transmitters, receivers and induction coils, by agreeing to rent the same to the City of Chicago and repair and renew them, for 50 cents apiece per year. The city accepted the offer, and took 1,557 such sets for the Police, Fire and Street depart- ments, at this rate, and would have probably continued to act on this contract had not the ordinance of November 6, 1907, given the City, in return for the franchise, the right to use the transmitter and receiver free of charge. In the absence of any access to the books of the Western Electric Company, it must be assumed that the contract with the City by the Chicago Telephone Company was not a losing one. It would indeed be fair to assume that if the company could afford to make a 50 cent price in competition with other companies for the small number needed by the City departments, it could afford to make a still lower price to 'the Chicago Telephone Company for the vastly larger number needed by the latter. 2. PATENTS: The Chicago Telephone Company does not appear to buy patents as such, but to buy from the Western Electric Company goods many of which are patented. Since most of the goods, however, have been sold of late on substantially the same terms to independent telephone companies, the question at issue relates only to the few patented articles which the Western Electric Company refuses to sell to other than the Bell companies. The only one of these patented articles upon which the Chicago Telephone Company lays any stress, is the so-called Pupin coil, invented by Prof. Pupin of Columbia University, New York City, about twelve years ago. Its purpose is to reinforce the electric current at various points along the telephone line so that a small wire will carry the sound as distinctly as a larger and therefore more expensive wire would otherwise do. Its chief use is on long distance lines. In- Chicago it is only used on some of the connecting trunk lines from one central office to another when the latter is over nine miles distant. Figures have been presented by the Chicago Telephone Company to prove that even on these lines the Pupin coils have saved an investment of $2,000,000 worth of copper wire, whose yearly value, on a 7% basis, with an allowance of 1%% depreciation, is $170,000 a year. There is, however, another side to this question. It is not only what these patents may be worth to the local company, but their cost to the parent company. Especially is this important when the parent company absolutely owns and controls the policies of the local company, and all bargains which it may make. Now, the A. T. & T., in its Annual Keports up to and including those for 1907, gave a yearly statement of the value of all its patents. It is to be regretted that this policy of publicity was not continued. However, since the Pupin coil was patented about 1900, and since no important patents since 1907 have been emphasized as defenses for the payments by the local companies, the Balance Sheet of the A. T. & T. for January ], 1908, may be quoted as very significant. According to that report the entire value of all the patents owned by the A. T. & T. at the close of 1907, was given to the stockholders as only $277,937.35. Since the total number of telephones belonging to the Bell companies in the United States at that time was .'5,035,533, the value of these patents per telephone was only 9 cents, and the entire capital value to be apportioned to Chicago, on the basis of the 202,600 stations then in service by the local company, was less than $20,000. To be sure, the smaller companies have less use for the Pupin coil than has Chicago, but by far the greatest use is on the long distance lines. 3. ENGINEERING, ACCOUNTING AND LEGAL SERVICES: The company undoubtedly receives some benefit from the parent company in these ways. Whether the latter does not receive a sufficient reward in the dividends on the majority of the stock owned by it, in every local company, is another question. As regards all three of the above lines of service from the national company, it may be said that the reports of this company to the Massachusetts Highway Coin 711 ission, indicate a very large profit from the aid given in the above ways to the local companies. The 4 1 /&% payment to the A. T. & T. yielded in 1911 for business within the city $445,550. This was $1.76 for each of the 253,753 'phones in use on the average last year. Of this $1.76 per 'phone, the amount justly earned by the A. T. & T. does not appear to be over $1 made up as follows: TABLE 3. RENTALS TO AMERICAN TELEPHONE AND TELEGRAPH COMPANY. Rental of transmitter, receiver and induction coil $0.50 Interest, depreciation, taxes, royalties, etc., on patents, estimated at 22% of the cost 9 cents per 'phone of said patents, as above 02 Services and unknown or undervalued items, not over 48 Total reasonable payment $1.00 Amount of excess payment per 'phone 76 Amount of excess payment, total $192,837.00 Per cent, of said excess payment to the present conceded value of all the telephone property in the city, of $25,495,036 -.76% There may be a legal question as to the power of the city to reduce this pay- ment directly, but that these considerations should have some bearing on the fixing of rates, which in the end inure to the benefit of the A. T. & T. now owner of over 95% of the stock, is clear. 18 Maintenance and Depreciation Reserve. The final element in operating expenses centers around the effort to keep the original value of the property intact. Before we can consider a fair return on the cash put into a property by the stockholders and bondholders, we must assume that the principal of the investment has not depreciated in value. Otherwise the investor will have the right to demand in his turn not only a fair profit, but insurance against loss of the original investment. Now a telephone company, like other municipal utilities, has to face a tend- ency to the decline in value of its property from four causes, viz., physical decay, inadequacy, obsolescence, and municipal requirements. A word may be said with regard to each. 1. Physical decay or wear and tear: All material things wear out in time, or are liable to destruction by accident. Eepairs must be constantly made, and in time the plant must be renewed or replaced. 2. Inadequacy: The development of the business of a telephone plant often requires the substitution of larger switchboards, underground cables with more wires, etc. 3. Obsolescence: Invention frequently leads to the substitution of new plant for old. For example, we no longer are content with the ringing of a bell in order to secure the attention of "Central," but seek immediate attention by the mere removal of the receiver from the hook. New types of cable and duct are introduced from time to time. 4. Municipal requirements: Cities more and more require the burial of wires in expensive conduits, and sometimes require the re-location of the conduits them- selves to make room for subways, etc. All four forms of decline in value have been encountered here. Three lines of expense have been incurred to meet them, repairs, reconstruction and deprecia- tion reserves. The first two, repairs and reconstruction, or renewals, are often classed together under the name of maintenance. They alone represent actual expenditures, directly designed to keep the plant intact. The Chicago Telephone Company, however, has accumulated a reserve to meet extraordinary requirements and such depreciation from inadequacy and obsolescence as in a rapidly growing plant might not be fully met from the maintenance account. Postponing for the moment any other method of meeting depreciation, atten- tion should be called first to the amount the company has actually expended for repairs and reconstruction, during the last 20 years. Until 1904 the company carried all its expenditures to meet these various forms of depreciation in one account, known as the maintenance account. In 1904 two divisions were made, that of "repairs," and that of "reconstruction and renewal." In January, 1910, a third division was created, known as "station removals and changes." This account had previously been carried in the main- tenance account. The present system of accounts is much better. A large part of the expense of change and removal of the telephone transmitter, receiver and house wiring is not an expense of repair or renewal, but a mere removal, or change of location. The estimate of the accountants (Hall's Report, pages 23-24) relative to the amount of repairs and reconstruction follows in the table below: It gives the average investment, except land, working capital, furniture, fixtures, tools, vehicles and construction in process, as found by Hall, and the actual expenditures for repairs and renewals since 1890. The average investment is found by adding to the investment of January 1st of each year, half of the additions of the year. 19 TABLE 4. AVEEAGE INVESTMENT IN DEPRECIABLE PROPERTY AND ACTUAL EXPENDITURES FOR THE MAINTENANCE AND RENEWAL OF THE SAME, 1891-1911. Year. Average Depreciable Investment. Percentage of Repairs and Repairs and Reconstruction to Reconstruction, average investment 1891 $ 1,901,859.40 $ 200,304.50 10.53% 1892 2,580,278.78 255,014.45 9.88 1893 3,322,833.13 276,627.40 8.33 1894 3,730,321.71 352,082.68 9.44 1895 4,010,432.25 435,669.12 10.86 1896 4,363,523.12 413,886.99 9.49 1897 4,703,850.31 355,453.96 7.55 1898 5,177,723.69 452,645.93 8.74 1899 6,171,416.78 515,218.40 8.35 1900 7,651,999.46 883,761.27 11.55 1901 9,560,846.96 816,851.97 8.54 1902 11,981,429.11 1,025,846.49 8.56 1903 14,312,487.60 1,272,578.20 8.89 1904 15,909,051.27 1,102,970.74 6.93 1905 17,304,637.09 1,560,822.09 9.01 1906 19,785,525.00 1,435,440.69 7.26 1907 23,549,541.08 2,311,304.05 9.81 1908 26,293,430.46 2,271,707.11 8.64 1909 27,754,261.76 2,336,507.47 8.42 1910 29,854,483.44 2,323,353.78 7.78 1911 33,277,902.01 2,313,597.12 6.95 1912* 37,350,508.47 2,759,830.68 7.39 *Based on the first six months January 1 June 30, which showed a net in- crease of construction of $1,925,052.31, which should be added to the depreciable property December 3, 1911, of $35,425,456.16. The current repairs of $1,401,933.94 less $365,053.60 station removals, leaves $1,036,880.34. To this should be added replacements of $343,035, or a total for the half year of $1,379,915. This is at the rate of $2,759,830.68 for the year. Decline in Maintenance. While there have been frequent fluctations from year to year in the percentage of actual expenditures for repairs and renewals to the investment for the year, there has been, on the whole, a steady decline in this percentage. It is best shown in the following way: During the first three years of 1891-1893, inclusive, the total expenditures for maintenance and reconstruction were $731,949.35, and the sum of the average investments of the three years was $7,804,971.31. The percentage was 9.38. Then in the same way the percentage can be found for 1892-1894, inclusive, 1893-1895, inclusive, etc., down to and including 1910-1912, inclusive. In the same way a five year period may be taken, beginning with 1891-1895, inclusive, following with 1892-1896, inclusive, etc. Finally, a seven year period may be taken, beginning with 1891-1897, inclusive, etc. The results are here tabulated: 20 TABLE 5. DECLINING KATIO OF EEPAIRS AND RENEWALS TO AVERAGE IN- VESTMENT BY GROUPS OF YEARS. Last Year One-Year Three- Year Five-Year Seven- Year of Period. Period. Period. Period. Period. 1891 10.53 1892 9.88 1893 8.33 9.38% 1894 9.44 9.17 1895 10.86 9.62 9.78 1896 9.49 9.93 9.63 1897 7.55 9.21 9.11 9.30 1898 8.74 8.58 9.14 9.11 1899 3.35 8.24 8.90 9.00 1900 11.55 9.74 9.34 9.52 1901 8.54 9.48 9.09 9.30 1902 8.56 9.34 9.11 9.00 1903 8.89 8.69 9.09 8.94 1904 6.93 8.06 8.59 8.58 1905 9.01 8.28 8.37 8.66 1906 7.26 7.73 8.07 8.39 1907 9.81 8.75 8.46 8.47 1908 8.64 8.64 8.44 8.50 1909 8.42 8.92 8.65 8.48 1910 7.78 8.26 8.39 8.32 1911 6.95 7.67 8.21 8.18 1912 7.39 7.39 7.77 7.96 The large jump upward in 1900 was due to the almost revolutionary changes incident to the rapid introduction of ten-party lines and many changes in switch- boards. A smaller impulse appeared in 1907-8, with the discontinuance of ten party lines and with the many other changes that attended the passage of the present ordinance in 1907. A trend line has been drawn, showing the general tendency. Its prolongation to 1917 reveals 7.5% in 1912 and 7.2% in 1917, or an average of 7.35% as the probable expenditure, yearly during the coming five years, that is, the average percentage of expenditures for maintenance to the average depreciable investment. This closely approaches the average of 7.39% for 1912 and for the three years 1910-12, inclusive, and 7.59% for the four years 1909-12, inclusive.* It therefore seems fair to assume 7.5% as a conservative percentage for maintenance for the next five years, unless the causes of the present conditions cease to operate, or are counter-balanced by other influences. *Detailed computations for four-year period are omitted. In his annual report, January 18, 1899, Mr. John M. Clark, the then president of the telephone company, anticipated the decline in maintenance, when he wrote. ' ' The business is still to some extent in the experimental stage, but it is confi- dently believed that that stage will soon be passed, and that when the various kinds of apparatus which are required shall become standard, when new and expensive switchboards will not become obsolete within two or three years from the date of their completion, that a better service will become possible, and that lower rates may prevail in the interest of the subscribers and in fairness to the company. ' ' The following table gives the separation that has been made on the books of the company between repairs and reconstruction since the attempt was made to keep them separately in 1904. 21 TABLE 6. EEPAIRS AND RECONSTRUCTION SINCE 1903. Percentage of Percentage of Re- Reconstrue- Years. Repairs. pairs to Average Reconstruction, tion to Aver. Investment. Investment. 1904 $ 1,008,730.56 6.34 $ 94,240.18 0.59 1905 1,144,874.97 6.61 415,947.12 2.40 1906 1,274,071.10 6.44 161,369.59 .82 1907 1,796,855.29 7.63 514,448.76 2.18 1908 1,306,415.07 4.97 965,292.04 3.67 1909 1,421,313.66 5.12 915,193.81 3.30 1910 1,769,706.64 5.93 553,647.14 1.85 1911 1,815,292.40 5.45 498,304.72 1.50 $11,537,259.69 5.96 $4,118,443.36 2.12 1912* 2,073,760.68 5.55 686,070.00 1.84 *Based on the first six months. This matter of increase of life and reduction of repair and renewal charges is so important that further discussion of the subject is desirable. This is especially true in consequence of the elaborate studies that have been recently made by the company to show the probable upward trend of maintenance in case of a great reduction in the rate of growth and no increase in the length of life of the telephone plant. It should be noted, however, that a reduction in the rate of growth will check that large source of present maintenance charges, viz., the necessity of tearing out good cables and switchboards to make room for larger ones. Inadequacy in the telephone business is an important cause of expenditure for maintenance. The slower the growth, the fewer would be the 100-pair and 300-pair cables pulled out to make room for 600-pair cables, and the less would central stations have to be enlarged and rebuilt to make room for more switch- boards. Similar Tendencies in St. Louis. The Bell Telephone Co. of Missouri has a property whose present physical value in St. Louis and other parts of Missouri, has recently been reported by the well known engineering firm of Westinghouse, Church, Kerr & Co., as about $7,000,000. An appraisal by these engineers and a report by the accountants, Haskins & Sells, was made on March, 1911, to a committee of the Board of Directors of the Missouri company. It is shown that the total expenditures for maintenance and renewals, 1901-10, inclusive, fell from an average of 7.71% of the A-alue of the depreciable property, during the first six years, to 5.65% during the last four years of the ten year period. Haskins & Sells thus discussed the matter. "Throughout the ten-year period the annual average has amounted to 6.46 per cent, of the value of the depreciable property and 24.61 per cent, of the gross earnings. The decrease during recent years in the relative amount of these expenditures is the natural consequence of the improvement in the character of construction which has taken place within the last ten years, such as the use of conduits, installation of cables underground and aerial and the increased stability of the art of telephony. ' ' Changes in the Art. A review of the development of the company indicates that far greater and more revolutionary changes have taken place in the past than are likely to occur in the future. Switchboards and subscribers' stations may change, but conduits 22 and cables have come to stay. The repair of all classes of telephone property is admittedly less expensive than formerly. Some illustrations will make this clear: AERIAL CONSTRUCTION: All telephone transmission prior to 1884, was upon poles, in the outlying dis- tricts of the city, and on the housetops in the business districts. Later all wiring was placed underground. These changes were brought about not only by the requirements of the city ordinances, but also by the discovery by the company that with improved methods of burying the wires, and the ability to place several hundred pairs of wires in a single duct and with the avoidance of injury from sleet storms, mischief-makers and other troubles, conduits were cheaper in the city than pole lines. Even the wires that do remain upon poles within the city, are mostly not part of the original pole lines, but are short stretches in alleys. The change has been less rapid in the suburbs, yet in the territory as a whole the percentage of open wire on poles declined from 84% of the total wire in use in 1885 to 8% in 1911. Within the city less than one per cent, of the mileage is open wire. CONDUITS: The original conduit installation, of any magnitude, was in 1884. The history since then may be divided into seven chapters: 1. The original installation of the so-called Dorsett conduit, a 6" compound duct. It was in 3-foot lengths, and made of a composition of tar, sand and cement. It was divided into two halves by a horizontal shelf partition or covering. Man- holes, consisting of a cylinder four feet in diameter, with a bell-shaped top, were built of the same material, and located along the line of the conduit, 300 or 400 feet apart. 2. The Brooks conduit, in 1886, of steel pipe from 2" to 4" in diameter, with splicing boxes at various intervals, in the form of a ball. 3. A square trough, about one foot on each side and about half filled with sand and cement. 4. A vitrified tile duct, in 1889 and 1890, 3 feet long and 10" square, with a horizontal dividing shelf, known ordinarily as 10"xlO". This conduit was laid in a rough support at the joints upon bricks, the joints being covered by a cemented burlap bandage. Brick manholes, generally square, were constructed; some small concrete vaults were also built. These are the first conduits of which any sections remain. At the close of 1888, 3,127 miles of wire had been laid underground. 5. Cement lined iron pipes, consisting of a 3" tube of stovepipe sheet iron, lined with cement, was the next improvement after 1892. At the same time creosoted wooden pump log, resembling but inferior in various points to a some- what similar construction today, was also introduced at this time. 6. In 1896 the 10x10 single duct vitrified tile, known as camp tile, came into use. The duct was surrounded by a concrete envelope. 7. In 1900, the McRoy or Multiple duct, likewise a vitrified clay product was introduced, and later it came into general use. For several years it has been the standard duct, and little improvement is considered likely. METHODS OF INSTALLATION OF WIRES AND CONDUITS: 1. The Dorsett conduit above described contained one, two and sometimes three small cables. For an outside protection the whole was wound with hemp, which was impregnated with an asphaltum mixture. After the cables were pulled into both the Dorsett and the Brooks conduits, from 1884 to 1888, the entire conduit was filled with oil. The cable itself was' boiled in kettles of hot oil. These kettles, with the necessary fuel for heating, were carried from place to place. After the cable was installed, in this expensive and difficult manner, no access could be had without excavation. There was a great objection among the people and the city authorities to the smoke and stench coming from the oil. It 23 was with great difficulty that the men were permitted to do the work except on Sundays or at night. 2. About 1888, a lead pipe armor, or protection of the hemp and tar compound both for aerial and underground cables, was introduced. The cables, with their wires insulated with cotton were drawn by hand through 50 to 100 feet sections of these lead pipes. The sections were then soldered together by a plumber, and the entire cable subjected to heat, filled with hot paraffin, sealed, wound on a reel and made ready for shipment. CABLES: While revolutionary changes were taking place in the poles, conduits and wires, an equally important change was taking place in the grouping of wires into cables for installation upon pole lines, or to a vastly larger extent, for insertion in conduits. 1. Cables of twenty No. 18 gauge rubber-covered, untwisted wires, introduced in 1884, in the Dorsett circuit already described. 2. Cotton insulated, straight wires, pulled into the Brooks circuit of wire pipe, 1886, filled with hot oil, as already described. 3. The introduction of a lead pipe covering, in 1888, to protect the wires against moisture and other damage, in both aerial and underground cables. Un- twisted cotton insulated wires were wound with string into a tight cable, and then pulled into the lead pipe, which was then filled with hot paraffin. The cable was exceedingly noisy, and not at all practicable. The pulling of these cotton insulated wires by hand, sometimes 90 pairs at a time, into 50 or 100 feet sections of lead pipe at the factory, before insertion of the hot paraffin, was a tedious job. 4. Twisted pair cables appeared in 1892, and were the next improvement. But the cables were solid and inaccessible, the location and removal of trouble was unsatisfactory and expensive. 5. The present day type of paper insulated, twisted pair cables was developed between 1892 and 1895. 6. Increase in the number of pairs possible in a cable and therefore in the duct of a conduit. The increase was from 90 pairs in the 80 's to 120 pairs of No. 19 cable in 1892, 400 pairs of No. 22 gauge cable in 1900 and 600 pairs of the same cable in 1904. 7. Loading coils, in 1906 and 1907, and the installation of special toll cables of large gauge conductors, were some of the most recent steps in the evolution to the present type of cable, which, like the type of wire and of conduit, appears to have reached a point of slow advance instead of the progress by leaps and bounds that had been going on up to about five years ago. CENTRAL OFFICE SWITCHBOARDS: 1. The telegraphic switchboard, adapted for telephone use. In this board, in 1880, the telephone operator at Central received the call for a subscriber on a tape register. He would then connect his telephone with the subscriber's line and ask what was wanted. The whole process was tedious. 2. The subscriber was given a means of signalling the operator direct on the same wires that he talked over. 3. The multiple switchboard was invented in the later 80 's, and one of the largest of its kind, at the time, was installed in Chicago. 4. The so-called "Express" board, invented about 1894, partly displaced this magneto board. Lamp signals took the place of drops, and the so-called Fuller battery, at the subscribers' instrument, was replaced by a storage battery. The subscriber could now signal the operator by merely removing the telephone trans- mitter from the hook, instead of turning the crank, as in the magneto system. 5. The present type of relay common battery switchboard was invented about 1898, but so many improvements were subsequently made, up to about five years ago, that it has been necessary to reconstruct most of the earlier switchboards of this type. These various improvements reduced the average time necessary for making connection for calls, according to President Sunny, from 90 seconds in 1886 to 18 seconds in 1908. This has, of course, been accompanied with a large reduction of expense of the operator's time in handling messages. 24 If the semi-mechanical system now in operation in the big laboratory building of the A. T. & T. and of the Western Electric in New York shall prove the success it promises, it will be used for new central stations and will justify its introduction by the large decline it will effect in the number of operators and in other costs. WIRE: 1. Iron Wire. Prior to 1890 practically all the wire used in the outside plant was No. 12 iron. 2. Copper Wire. About 1890, when 15,000 miles of wire were in use, copper wire began to supercede iron wire, although there was a short interval in which trial was made of some phosphor bronze wire. 3. About 1892, owing to the interference of the high voltage of electric railways and lighting plants, the telephone company began to change its single wire copper lines to 2-wire metallic circuits. Each of the above transformations, from iron to a single copper wire, and then to a 2-wire circuit involved a complete transformation of the wire system. The telephone ordinance compels the Company to place and keep in under- ground conduits all its wires from the Chicago Kiver on the North to Twelfth street on the South, and from Lake Michigan on the East to the South branch of the Chicago Eiver on the West, while in nearly all the rest of the city it must place all its wires underground, with the exception of wires not to exceed two blocks in length from underground connections to subscribers stations. Even these wires cannot be placed on poles on streets if there are alleys. In a general way it may be said that the Chicago Telephone Company can only use pole lines North of Howard avenue, West of Western avenue and Fortieth avenue, and South of Seventy-ninth street. The exact boundaries are to be found in Paragraph 10 of the Ordinance of 1907. Proportion of Property of Long Lived Construction. At the close of 1895 only 50% of the wires in the Chicago telephone territory, city and suburban, were underground. At the close of 1905, 64% were under ground, and at the close of 1911, 81% were under ground. So great, however, has been the reduction in the cost of construction per foot of conduits and cables that the proportion of the entire investment in land, build- ings, right of way, and under ground construction, exclusive of toll properties whose data is not fully available, has only increased throughout the Chicago telephone territory from" 37.6% of the total, in 1891, to 40.1% in 1911, and in the city the increase has been from 39% to 43.9%. These figures are readily computed from the data given in Mr. Hall's Exhibits B, C and D. The life, however, of both conduits and cables has itself so much increased that the real average life has undoubtedly increased much more than is indicated by the above figures. The cost of repairs, as already remarked, has undoubtedly declined with the growth in the art. This view is confirmed by President Vail, of the A. T. &. T. in his report for 1910. (Page 7.) : ' ' The present policy of the Bell System is to provide against every probable contingency and to base the amount and extent of such provision on past experi- ence not on future expectations. It is conjectured that the future will show a decrease in the depreciation or reconstruction, due to decay, wear and tear, and obsolescence. Changes improvements are going on as rapidly as in the past, but the general character of plant and methods is assuming more permanency. The improvements are being evolved from and are being grafted on to the old system and methods. The disturbing and sometimes seemingly destructive condi- tions following the rapid development of high pressure power and transmission have been to a great measure overcome. "All this has been made possible through the unremitting study and research of the staff of the Engineering and Experimental Departments of the Company, who, by close attention, observation and study, anticipate and provide for all such contingencies and conditions as can possibly be anticipated or provided for in advance. 25 ' ' Under these conditions there is small probability that any such causes as those which forced the wholesale reconstruction or rearrangement of plant in the past will again occur; it is, however, for the benefit of the public and of the corporation to have an ample reserve for any contingency which may happen. ' ' The Company's Depreciation Reserve. The Chicago Telephone Company has collected from the subscriber and set aside as a depreciation reserve, a further sum of $5,091,823.19 to meet depreciation that may be revealed at some time in the future. Of this fund about $2,241,141 was set aside in 1910 and 1911. This depreciation, assumed to exist after all current expenditures for repairs and renewals may be called residual depreciation. The property of the company on January 1, 1912, had been built up from the fol- lowing sources: First mortgage 5% bonds $ 5,000,000.00 Loans by banks 1 ,000,000.00 ( iipitnl 'stock 27,000,000.00 $33,000,000.00 Depreciation reserve $ 5,091,823.19 Insurance fund 307,548.21 Other reserves 244,735.49 5,644,106.89 $38,644,106.89 In addition to the above, current assets of cash, bills, accounts, receivable and prepaid expenses amounted to $1,690,067.42 but these were balanced by current liabilities of accounts payable and accrued liabilities not due, amounting to $1,886,285.34. Leaving out of account these latter items of current assets and current liabilities, which virtually offset each other, there remains as just stated two chief sources of the property of the Telephone Company, to wit: $33,000,000 furnished by the stock and bond holders and banks, and about $5,650,000 supplied by the telephone users, in order to keep the investment of the stock and bond- holders intact. The question will later arise whether the $27,000,000 supplied by the stock- holders came in part from earnings in addition to large dividends, but that problem does not arise at this point. The depreciation reserve above referred to is not the only amount that the company set up in the past as representing depreciation. From 1894 until 1907 the company, after distributing dividends of 10%, had charged to operations $3,767,233.55, which was written off the plant account. Early in 1908 the company appears to have concluded that the property had not depreciated to any such extent. The whole of this $3,767,233.55 was transferred to surplus, leaving the plant account as it would have been without any such deduction. This credit to surplus formed the basis of the stock dividend of $4,500,000 in that year. Not only was the above amount of $3,767,233.55 charged to operations and maintenance, but an additional amount of $1,575,000 was charged during the above period as mainten- ance, which likewise eventually found its way into the surplus. (Hall, page 20.) The total amount thus included in operations, purporting to represent a provision for depreciation, or for deferred maintenance, but which was diverted to the benefit of the stockholders, was therefore $5,342,233.55. The dividends were indeed reduced in 1908 from 10% to 8%, so that the total dividends were not materially changed. But in so far as an 8% dividend is less subject to public criticism and less liable to reduction in a change of rates than is a 10% dividend, the stock- holders gained. Tn another way, they also gained. By writing up the plant investment several million dollars, the justification for the increase of stock and for a profitable return thereon, was given to the public. 26 The important feature of the transaction was the revelation that the company considered that there had been less depreciation by $4,845,000, than the books have hitherto shown. Consequently the telephone users, in paying such charges as to permit the accumulation of that fund, in reality had not been accumulating a fund with which to meet depreciation, but had been increasing the profits of the company, which the latter had invested as surplus in extensions and then capital- ized. Naturally, such a transaction makes one a little critical with regard to the new accumulation of $4,971,823.19 in one depreciation account and of $120,000 in another. The Appraisal. At this point the appraisal made for the Company by Byllesby & Arnold becomes of vital importance. Does this appraisal, made with great care and regardless of expense, show that enough has been collected from the subscriber to keep intact the investment by the stock and bond holders, of approximately $33,000,000? If not, then the investor is justified in calling on the telephone user for a larger yearly addition to the depreciation reserve. On the other hand, if the payments by the subscriber to this fund have more than kept the property intact, a smaller contribution may henceforth be reasonably made by the public. In approaching this appraisal, however, hasty conclusions must not be drawn. An attempt must be made to correct the appraisal where it is found to be in error, even if in so doing, the value of the property may be reduced and the need for a depreciation reserve be thereby increased. In the long run the public will gain by a complete knowledge of the situation, and will not desire to take any unfair advantage of the appraisal. On its face the appraisal would indicate that not only had the actual expendi- tures for maintenance kept the value of the property up to the above $33,000,000, but the appraisal would also indicate that in the opinion of Byllesby & Arnold, the property was worth much more today than even the sum of this $33,000,000 of investment and of the depreciation reserve. The following table will make this clear. TABLE 7. APPEAISED VALUE NEW AUGUST 1, 1911. PHYSICAL PEOPEETY. Chicago Eeproduction Subject. Value. Buildings $ 2,642,405.00 Land 1,173,937.00 Central office equipment 4,960,673.00 Subscribers' station equipment.. 6,409,151.00 Exchange lines 14,746,383.00 Toll lines 934,369.00 Construction in process 1,392,861.00 Office furniture and fixtures.... 245,151.00 Tools and vehicles 273,426.00 Supplies 660,288.00 Working capital 887,250.00 Total $34,325,894.00 Plant development expense $ 564,636.00 Total physical property 34,890,530.00 Cost of developing the business. . 4,753,993.00 Suburban Eeproduction Value. $ 320,498.00 157,706.00 747,298.00 1,281,074.00 5,388,296.00 1,936,761.00 196,340.00 20,957.00 99,222.00 261,308.00 162,750.00 $10,572,210.00 $ 183,352.00 10,755,562.00 2,340,253.00 Total Eeproduction Value. $ 2,962,903.00 1,331,643.00 5,707,971.00 7,690,225.00 20,134,679.00 2,871,130.00 1,589,201.00 266,108.00 372,648.00 921,596.00 1,050,000.00 $44,898,104.00 $ 747,988.00 45,646,092.00 7,094,246.00 Total property and business $39,644,523.00 $13,095,815.00 $52,740,338.00 27 Referring to the totals in the last line, before deducting the depreciation, Byllesby and Arnold write (Appraisal Vol. 1, Page 24-25): ' ' These totals represent the investment of the Chicago Telephone Company in its property and its attached business on the basis outlined, and include in addition to the appraised value of the physical property and the development cost of such property, no element of what is commonly designated as "going concern ' ' value other than that represented by the cost of establishing the busi- ness, which cost has been worked out on the definite, conservative premises here- inabove described." It would be fortunate indeed for the city, if the Chicago Telephone Company were really entitled, in this rate investigation, to this value new of $52,740,338 or even to the present value of $42,915,926 based on the largest amount of observed and estimated depreciation which the appraisers were able to compute. The less the depreciation the lower need be the rate of return to secure a fair profit on the investment. If there were no net depreciation whatever, not only would deprecia- tion charges be eliminated, but the property would appear so much safer to the average investor, that he would furnish money for needed extensions, at a* lower rate of return, than if the physical property every year bore a lower and lower proportion to the outstanding securities. The larger the physical value back of stocks and bonds, the lower the rate of return, other things being equal, that will be demanded by the investor. A continual rise, for example, in the price of labor and material, would increase the cost of construction and the appraised value of the property, but would lessen the percentage of the present investment that would be borne by the old investment that is scrapped from time to time. It seems necessary, however, to dissent from some of the positions taken by Byllesby and Arnold, and consequently to differ from some of the conclusions reached by them. In this no reflection is intended upon their well known ability and integrity of purpose. Copper. Among the doubtful points in the appraisal may be mentioned the price of copper and the assumed life and net salvage employed by the appraisers. Copper was taken at 16 cents a pound, as of August 1, 1911. The following table gives the average yearly price for each of the 19 years, 1893-1911, inclusive, as taken from the Iron Age by the Chicago Telephone Company. These prices are a little lower than those given in the Telephony Directorv of the telephone industry, 1912 edition (page 333): TABLE 8. AVEEAGE PEICE OF COPPEE. 1893 10.817c 1894 9.472e 1895 10.693C 1896.. ..10.964C 1893-6 10.4S7C 1897 10.250C 1898 11.954c 1899 17.729C 1900 16.545C 1901.. .. 1902 11.626c 1903 13.235C 1904 12.823C 1905 15.590C 1906.. . J9.278C 1902-6 14.510C 1907 20.004C 1908 13.208C 1909 12.982C 1910 12.738C 1911.. ..12.576C 1897-1901 14.518C 1907-11 14.302c Average for 1893-1901 12.726c Average for 1902-1911 14.406c Average for 1891-1911 13.610c 28 January, 1912 14.24c March, 1912 14.60c May, 1912 16.00c July, 1912 16.90c September, 1912 17.40c Average, January to September. .15. 82c The above table would indicate that 16 cents was high. The company, how- ever, has established an elaborate trend curve of prices of copper to show that 16 cents a pound is in line with the trend or tendency of prices, at the time of the appraisal. Since the earliest quotations at hand beginning in 1883, coppei has averaged less than 16 cents every year save in 1888, 1899-1901 inclusive, and 1905-1907 inclusive. During those years only 309,433 miles of wire out of 807,751 in use at the close of 1911, or 38% were laid. It would be easy to show that copper had not from the beginning averaged over 15 cents and had not even aver- aged that during any period of five or more years preceding the appraisal. At the same time if the test of value is not to be the actual cost or recent costs, but probable costs of material and labor during the next five years, then 16 cents may be accepted as a probable price. Overhead. We will first take up the appraisal of the property new and later consider the depreciation. The appraisers, Byllesby & Arnold, have assumed that the Telephone Com- pany's property and business are not in existence, but are to be constructed new. After an exhaustive inventory of the principal items of the property, they have estimated the cost of materials, tools and labor required to reproduce new each item in place as of date August 1, 1911. In this base figure were included all contractor's charges, which would embrace his costs, his profits and his allow- ance for contingencies. No general contractor was assumed, but a* contractor was allowed only for such portions of the work, as have usually been put in by contract, such as buildings and central office switchboards. To the base cost obtained as above, a percentage, varying with the different classes of work, was added for reorganization, engineering and incidentals. In these items were included general office expenses in securing bids, awarding contracts, making out bills of material, purchasing materials, legal expenses and salaries of the officials, whose work is chargeable to construction. Engineering includes preparation of plans, drawings and specifications, and the expense of general supervision and inspection in the carrying out of the plans and specifications. Incidentals include insurance against fire and accident, and all general expenses lying outside of the estimated contract cost; such as small changes in design. They might be included as extras on the contract price. These expenses vary from 5 to 15% in the various schedules, aggregating 12.19%. In case of land only 5% was added, which was intended to cover selection of site, search of title, purchase fees and such of the reorganization and incidental expenses mentioned above as were applicable. After adding to the base figures the above allowance of 11 to 12% for reor- ganization, engineering, etc., a further percentage of about 7% was added to cover interest and taxes during construction, and other so-called carrying charges and cost of obtaining money. They have all been termed brokerage. This was small in the case of substation equipment tools vehicles and supplies, which, it i* assumed, are put in service immediately upon purchase. The following table summarizes the matter of overhead. 29 TABLE 9. SUMMAKY OF OVERHEAD. Percentage City and Percentage Description. City. of Base. Suburban. of Base. *Base figure $26,762,224.69 100.00 $35,217,600.90 100.00 Organization, engineering, etc. 3,263,204.34 12.19 4,468,147.48 12.68 Total of above..! 30,025,429.23 112.19 39,685,748.38 112.68 Brokerage 2,020,353.27 7.55 2,573,153.96 7.31 Entire value new 32,045,782.50 , 119.74 42,258,902.34 119.99 Entire overhead, included in above 5,283,557.81 19.74 7,041,301.44 19.99 *Aside from construction in process and working capital. If the value of this plant is to be determined by what it would cost to dupli- cate it, if all knowledge of the present location of the conduits and central stations, etc., were suddenly obliterated from the mind of man, then this allow- ance of 19.99% for overhead on top of contractor's profits on each portion of the work is no higher than engineers often claim in such appraisals. The writer, however, has always contended that one could not assume such a fanciful theory as the above, but must assume that the knowledge now possessed, and indeed, in large part reduced to writing in the inventory, cannot be blotted out of men's minds even for the purpose of an appraisal The Wisconsin Eailroad Commission only allows 12% above base figures and in its base does not include so much contract work. The Massachusetts Gas and Electric Light Commission will have nothing of this theory of reproduction, but sticks to the historical costs. All of the installation of cables and much of the subscribers sub-station and some of the central office equipment were done direct by the Chicago Telephone Company, without any contractor and probably with less than 15% for over- head instead of 19.99%. As for brokerage, of which the chief item is interest during construction, this Chicago company has always earned enough to pay all such charges and large dividends besides. If brokerage had been charged to construction in the past, operating expenses would have appeared less and profits greater. A greater reduction of the rates in 1907 might then have been secured. The company hav- ing secured the benefits of charging brokerage to operating expenses can hardly put the charge now into construction. If the overhead allowed by the appraisese had been only 15%, instead of 19.74% in the city, and 19.99% in the entire territory, the appraisal new would have been reduced $1,268,696 in the city, and $1,757,684 in the entire territory. Land. The land owned by the company in the city and suburbs, cost the company, according to their books, $601,801.14. Its present value is given by Byllesby & Arnold at $1,331,642.60, an increase of $729,841.46 or 121%. In the following table is given the book value; that is, the cost as appearing on the books, and the appraised value, after the addition of all overhead charges and the relation between the cost and the appraisal for each piece of land in the city. 30 TABLE 10. LAND APPEAISAL AND COST. Appraisal. ] Book Value. Austin office $ 16,124.06 $ 9,200.00* Calumet office 61,425.00 33,513.08 Canal office 7,371.00 6,000.00 Central Division headquarters . . . 21,498.75 17,539.75 Cortland street lots 2,457.00 1,652.49 Douglas office 19,751.99 18,084.00 Edgewater 3,071.25 2,000.00 Harrison street lot 257,985.00 176,972.77 Humboldt office 5,769.34 4,200.00 Hyde Park office 6,142.50 5,687.50 Irving Park office 6,081.08 3,530.00 Kedzie office 4,422.60 3,120.00 Lake View office 4,422.60 3,360.00 Lawndale office 7,033.16 4,000.00 Lincoln office 5,307.12 5,500.00 Main office 462,723.58 40,420.00 Monroe office 24,692.85 14,362.50 North office 22,113.00 21,525.00 Northern Division headquarters. 25,798.50 14,448.35 Oakland office 10,411.54 10,500.00 South Chicago headquarters' 7,383.29 7,175.00 Southern Division headquarters. . 12,511.04 7,000.00 Wabash office - 144,84.0.15 96,026.17 Wentworth office 7,371.00 5,610.00 West office 2,616.71 4,090.00 West Pullman office 1,228.50 1,000.00 Western Division headquarters . . 17,291.01 10,550.00 Yard office 6,093.36 4,550.00 Total $1,173,936.98 $531,656.61* *Given in the appraisal by mistake $4,700 less. fDecreases. TABLE 11. LAND BASE AND OVEEHEAD. Increase Per over cent. In- Book Value, crease. $ 6,924.06 75.3 27,911.92 83.3 1,371.00 22.8 3,959.00 22.6 804.51 48.7 1,667.99 9.2 1,071.25 53.6 81,012.23 45.8 1,569.34 37.4 455.00 8.0 2,551.08 72.3 1,302.60 41.8 1,062.60 31.6 3,033.16 75.8 192.88f 3.5 422,303.58 1044.8 10,330.35 71.9 588.00 2.7 11,310.15 78.1 88.46f .8 208.29 2.9 5,511.04 78.8 48,813.98 50.8 1,761.00 31.4 l,473.29f 36.0 228.50 22.8 6,741.01 63.9 1,543.36 33.9 $642,280.37 119.4 Description. City. Base figure $ 955,585.65 Eeorganization, engineering, &c. 47,779.28 Total of above 1,003,364.93 Brokerage 170,572.05 Total value 1,173,936.98 Overhead included in above.. 218,351.33 Percentage overhead to base. 5.00 105.00 17.85 122.85 22.85 City and Suburban. $ 1,083,958.15 54,197.91 1,138,156.06 193,486.54 1,331,642.60 247,684.45 Percentage overhead to base. 5.00 105.00 17.85 122.85 22.85 How to treat the increase in land values, in a rate case like this, has been and still is a much disputed and unsettled question. The tendency of the courts has been toward the recognition of this increased value. Such has also been the practice of the Wisconsin Eailroad Commission. On the other hand, the Massachusetts Gas and Electric Light Commission, which has, by far, the greatest age and prestige of any of our commissions, has always refused to recognize increase in the regulation rates. It is held that only on the sale of such land can the company divide as a surplus the unearned increment, and it is not certain that even then the Massachusetts Commission would not compel the use of the proceeds of the sale in meeting needed extensions. The only other commission of 31 any age which has considered this question very fully is the Public Service Com- mission of the First District of New York, covering the City of New York. In the cases of the Queens Borough Gas and Electric Company, decided June 23, 1911; the Brooklyn Borough Gas Company, decided August 18, 1911, and the Kings County Lighting Company, decided October 20 and November 17, 1911, this Commission held that if the company were entitled to capitalize the increased value of its land, then the annual increase of such value should form part of the reasonable rate of return to which it was entitled and the returns from the consumer in charges should be proportionately reduced. Commissioner Lane of the Interstate Commerce Commission, in rendering the report of the Commission, relative to the proposed advances in the Western Trunk Line Trans-Missouri and Illinois Freight Committee territories, held (20 I. C. C. Eep. page 344): "Whatever the true economic or legal view may be as to the right of a carrier to consider the increase in value of its land as a part of the value upon which it is entitled to a reasonable return, such increase in value does not of itself establish the right of a carrier to increase rates upon a given service. Certainly if the Supreme Court may decline to lay down the absolute rule that 'in every case the failure to produce some profit to those who have invested their money in the building of a road is conclusive that the tariff is unjust and unrea- sonable.' (Eeagan v. Farmers' Loan & Trust Co., 154 U. S. 412.), it is a con- servative statement of the law to hold that a railroad may not increase the rates upon a number of commodities solely because its real estate has risen in value. ' ' If the appraisal be correct, the value of the land has increased from $601,801.14 to $1,331,642.60. This is a yearly arithmetical increase of 10.5% on its original cost. The method by which this result is reached is as follows: The cost of the land on December 31, 1887, was $40,420. Now, $40,420 used for 24 years to the close of 1911 is equivalent to $1,018,080 used for one year. By December 31, 1892, an additional amount of land had been acquired costing $182,634. This for 19 years is equivalent to $3,470,046 for one year. Reckoned in this way the land is equivalent to $6,995,621 for one year. The total increase of value of $729,841.46 is 10.43% of this. An increase of 10.43% of the original cost ($601,801.14) owned on August 1, 1911, the date of the appraisal, is $62,768 a year. This is the annual amount of increase of land values which on the basis of its past history the Company may reasonably expect to receive during the next few years. It represents an addition to its income of about one-quarter of 1% on its stock, and is taken into consideration by the New York Public Service Commission, First District, in fixing rates. Paving. The appraised value of the paving over the conduits in the city is $2,198,916. Of all the conduits, 84% are under the paving, but 2/7 of this paving was put down after the laying of the conduits, and represents no investment by the Telephone Company. The appraisal of this portion of the paving, $628,262, should be deducted. This is in accordance with the ruling of the Wisconsin Eailroad Commission, the New York Public Service Commission of the First District, the Massachusetts Gas and Electric Light Commission, the Iowa State Supreme Court, recently confirmed by the United States Court in the Cedar Eapids gas case, and by Judge McPherson of the United States District Court in the Des Moines gas case. Commenting on the matter of paving, and on the general theory of considering only the cost of reproduction, which is the method used by Byllesby and Arnold, Judge McPherson in his opinion, August 21, 1912, says: "But the question is as to its value to-day with reference to income. What it may have cost is pertinent. What it will sell for is to be considered. And if destroyed by any agency, such as rust, crystallization, or other forces, what must be paid to reproduce it is a subject of inquiry. All of these may be considered. In my opinion those who maintain that what it will cost to reproduce the plant, less depreciation, is the true value, in many instances, confound the real question with one of many evidences of the real value. Reproducing cost is an evidence of 32 what the real value is after subtracting the depreciation. But what is to be done with the value of stocks and bonds on the reproductive theory? And what becomes of the original cost on the reproduction theory? And what becomes of the question of the increase or falling off in numbers of consumers? And the same as to increased or diminished expenses? ' ' The theory at first thought in all cases is plausible and attractive, but in the end is oftentimes utterly illogical and unreliable, originally adopted as a mere time-saver by mere theorists, and sought to be enforced as against substantial unbending facts. If the plant is to be reproduced, when is it to be done? If reproduced, will the streets then be paved, and, if paved, paved with what? Must it all be reproduced at once, or the same covered by a number of years? If but gradually reproduced, why should not such cost go into either the operating or maintenance account? No one can state when it must be repro- duced, and a material question arises: What, then, as compared with the present, will be the price of labor, material and freight? But finally and to my mind the conclusive reason against the soundness of the reproduction under paved streets theory is, that to allow that theory to prevail, and to increase the capitalization now to the extent of $140,000, is to allow such gas rates as will pay a dividend on such sum from and after this date. But the sum of $140,000 is not put in the capital or value account until the plant is reproduced. "As, of course, streets paved or uupaved make no difference in the earning power of the gas plant, and but little, if anything, goes more directly and accu- rately to the question of value of any structure or plant than its rental, earnings, or as a dividend producer. ' ' There are many instances in which the reproduction theory is the best of all methods for getting at the present value, and in other instances the most mislead- ing. And it is deceptive, in my opinion, to now add the cost of taking up and replacing pipe under paved streets at an estimated cost of $140,000 extra, and does not warrant an increased dividend of $8,400 or some greater sum. Such a dividend is a mere paper dividend, and is arrived at, not because of increased earnings, not because of increased capital or investments, not because of increased operating or maintenance expenses, but solely by reason of a supposed necessity of at some time replacing the same, in some manner, under a then some kind of street, on a mere guess of what labor and material would then cost. Many of the principles with relation to railway rates are applicable to gas rates. And perhaps the latest analysis of the reproduction theory is found in the recent case of Louis- ville R. R. v. Railway Commission, 196 Fed. Rep. 800, in an opinion of Judge Jones of the Alabama District. He shows the value of this theory, but likewise shows that it is not a hard and fast rule covering all phases. Finally, pipes under a paved street are of very long life; many times longer than if the street were not paved. ' ' The theory applied to paved streets is but a theory, is illogical and against facts, and was properly denied by the Master." An added reason of great importance in this case for excluding paving since the laying the conduit is in the ordinance of November 6, 1907. This provided that if the city should purchase the property on January 1, 1919, or 1924, or after the expiration of the franchise January 8, 1929, should transfer to any other company such right, the rules governing the valuation to appraisers should be as follows: ' ' The appraisers shall determine what tangible property, real and personal, owned by the said Company, and used for the purposes of this grant, is reason- ably required for its continued operation, taking into consideration the then con- dition of the art, and in determining the fair cash value of said property they shall not take into consideration its earning power, or the value of the rights or privileges hereby granted, or the value of any license or franchise, but shall allow for the property the then cost of duplication, taking into consideration the then condition of the art, less depreciation. In considering the cost of duplication of underground conduits, wires, cables, electrical conductors and any other under- ground construction located in any street, alley or other public way which was or were placed therein at a time when such street, alley or other public way was unpaved, the said appraisers shall not take into consideration the cost and expense of removing or replacing any paving, or part thereof, in such street, alley or other public way. An award in writing, signed by a majority of the appraisers, shall be valid and binding upon the parties." 33 Working Capital. The appraisers not only appraised working assets, such as supplies, at $921,596, but they assume that the Company needs, in cash or its equivalent $1,050,000. This form of working capital they divided between the city, $887,250, and the suburban division, $162,750. The total when added to the supplies makes a total working capital of $1,971,596. Even the estimate made by Mr. Hall, of $1,750,000, seems large. Expenses for one and one-half months would be one-eighth of the $8,836,827.49 of total expenses in 1911. In other words, it would amount to $1,104,603.44. In a company which collects its revenue monthly and reeeives some of it in advance, a working capital equal to the expenditures for one and one-half months would appear to be ample, especially in view of the fact that it can obtain at least 30 days' credit on most of its purchase of supplies. Now, one-eighth of the entire payroll for the year 1911, of $6,332,485, is only $791,561. The current assets of cash and deposits, bills and accounts receivable, and prepaid expenses at the close of 1911, exceeded the accounts payable presumably non-interest bearing by only $475,212.17. Such a sum added to the entire appraised value of the supplies, of $921,596, would be only $1,396,808.17. In view of all this, $1,500,000 would appear to be a maximum amount necessary to allow for all forms of working capital. This is $578,404 in excess of supplies at hand. However, as the matter relatively is not of large importance, $1,750,000 may be used for the entire working capital, or $828,404 for that portion of the same, viz., cash or its equivalent, for which the appraisers allow $1,050,000. A reduction from the appraisal may thus be made of $221,596. If this be apportioned between the city and suburban territory, in the ratio of the reproduction value, then 76.26%, or $168,989, would be taken from the working capital allowed by the appraisers for the City. / Cost of Plant Development. After reaching a reproduction value new for the physical property of $44,898.104, or one-third more than the $33,000,000 of stock, bonds and loans from the banks, the appraisers add $747,988 for changes that may be made in the plans as the work of construction during the assumed five-year period proceeds. In the words of the appraisers: "The expenditures cover a variety of items, such as the alteration or recon- struction of buildings to provide for the enlargement of the plant, and reconstruc- tion or enlargement of equipment incident to the growth of -the business. For example, certain exchange offices when built were of ample capacity to handle the needs of the company at the time they were constructed. They, however, were built with provision for extension at a future time, and at a later date they were reconstructed and enlarged as necessary to handle the needs of the com- pany. As a result the total expense of buildings to the telephone company, including this reconstruction, is greater than the value of the property as deter- mined by inventory of the building as it now stands. "In a similar way, many changes in telephone equipment have been made due to the development of the business, which have entailed expenditures that would not be included in any value arrived at by the inventory. It is the inten- tion to include in the plant development expense such an amount as would repre- sent the normal expenditure that would be made in case the property is repro- duced within the assumed construction period of from five to eight years." The allowance for this purpose is 2% on the cost of buildings, central office equipment, subscribers' station equipment and exchange and toll lines. It may be a logical consequence of the theory of reproduction to allow this plant development cost, but to one who holds that a voucher is better than an estimate, and that the cost of recent construction furnishes better unit figures for reconstruction than does the judgment of even the best engineers, it does not appear to be a correct view. Since the entire construction cost that has gone on the books of the Company is only five-sixths of the estimated reproduction cost as estimated by Byllesby and Arnold, a further addition of nearly $750,000 for estimated changes of plant during construction seems hardly warranted. 34 The cost of such changes must have been put upon the books and must have appeared in the book value of the property, or must have been charged to oper- ating expenses and thus have been paid for by the telephone subscriber. In the former case, the Company secures the equivalent of the above cost. In the latter case, it does not appear entitled to this value, if secured from the con- sumers under the guise of operating expenses. If the latter, as put upon the books, had been less, the profits would have appeared to the communtiy greater, and there might have been an even larger reduction of rates in the November, 1907, ordinance than was made. Cost of Developing the Business. For the cost of developing the business in the city, the appraisers have added $4,753,993, and in the entire territory $7,094,246. The estimate is so large and the matter so important that the argument of the appraisers may be quoted: "It is needless to say that the physical plant of the company has no value other than second-hand or scrap value, unless the plant is utilized for the purpose for which it is constructed, and the plant cannot be utilized for this purpose unless the business has been secured. "In estimating this element of value, the following method has been pursued. It has been assumed, as stated before, that the property could be reproduced within a period of five years. A construction schedule has been prepared, in which dates are assigned for the construction of various portions of the property now existing. In making up this schedule the plant has been reproduced somewhat as follows: "It has been assumed that, first, certain pieces of real estate for downtown offices will be purchased, and, next, that the exchange buildings will be con- structed, building space to be of the present capacity, and that central office equipment or a fraction of the present capacity will be installed as the first installation; also that the conduit lines in the given section will be built com- plete, and that sufficient cables will be installed with the first installation to serve the partial equipment installed in the offices. Furthermore, it is assumed that a certain number of subscribers will be obtained as soon as this equipment is ready for service, and at that time the substation equipment will be provided. During & later year additional offices will be constructed and additional units will be installed in the offices already partially equipped. "An additional item of expense, which is part of the cost of securing busi- ness, is included in this schedule at this point, representing the cost of securing subscribers and printing the first issue of the directory, which amounts, as shown by study of the present operating statistics, to slightly over $4.00 per subscriber, and the total obtained by multiplying the total number of subscribers by this amount is included in the proper column in the table. "The schedule thus arranged provides for the completion of the entire prop- erty within five years. The amount expended during this time is the amount shown in the appraisal exclusive of carrying charge. It has further been assumed that that company has a right to earn a fair return on the amount of money invested, and during any given period in the schedule after the first period a return has been figured on the investment at the end of the preceding period. ' ' The appraisers give further explanations and elaborate computations to show how, if a company started a new plant in Chicago today, with a field clear from competition, it would cost $7,000,000 to develop the business of the present company. In other words, the appraisers are seeking to estimate what is usually considered a form of "going value" based on a 10% return on the investment in the developing plant. Byllesby and Arnold prefer to call this by another name. It is the idea rather than the name that is important. The theory assumes, although it does not directly state, that the people of Chicago are to forget their knowledge of telephones and must be solicited, at much expense, in order to become acquainted with them. To imagine such a condition of sudden collapse of memory in this or any other city might be natural to builders of air castles or to the well-nigh extinct type of pure theorists among college professors who have been so much of a butt of ridicule among "practical men," but it seems curious when coming from prominent engineers. If Chicago were suddenly bereft of all telephone service by a San Francisco earthquake or some other catastrophe the present subscribers would need no soliciting to resume 35 the service at the very earliest possible moment. Indeed, one of the notable features of Chicago telephone history has been the almost entire absence of expense for soliciting of new business. In this respect it more closely resembles the street railway than the lighting utilities. It is indeed true that without business the physical plant would only have a scrap value. The cost of construction of the plant, even if it be $40,000,000, would not give the value without a demand for the service. In assuming a demand sufficient to give a value equivalent to the cost of the physical property, a certain type of going value is thereby generally conceded. If the courts shall insist upon allowing public utilities a further value beyond the investment, our public service commissions are likely to reduce the rate of return correspondingly, leaving to the companies but little more than just enough to escape the charge of ordering a confiscatory rate. The United States Supreme Court, after listening to able arguments on behalf not only of good will but of going value in the Consolidated Gas case of New York in 1898-9, and in the Cedar Eapids gas case in 1912, entirely ignored the claim, while in the Knoxville water case, decided January, 1909, the court allowed it, but distinctly stated that it was not to be considered a precedent. None of the six prominent public utility commissions of Massachusetts, New York, Wisconsin, New Jersey and Maryland have so far allowed any going value, except in Wisconsin, and there only where, in the long run, the dividends in the . past have not appeared to the commission to be fair and reasonable. No such claim of lack of good dividends in the past can be made here. Early Profits. In 1881, the first year of the Company's history, no dividends were paid. From that time until 1908 the dividends were never less than 10%. They were reduced to 8% in 1908 and have been of that amount since then; but the reduction from 10% to 8% was accompanied by an increase of stock out of earnings from $22,500,000 to $27,000,000. The actual dividend, thus, on the stock representing any cash contribution from the stockholders, scarcely declined at all. In other words, the dividends now paid of $2,160,000 on $27,000,000 of stock represent 9.6% on the $22,500,000 worth of stock outstanding at the close of 1907, before the capitalization of surplus earnings. It is interesting to observe that had the stockholders been content with 10% on their actual contribution from the start, and had they been further content to pay off the stock out of earnings in excess of 10% on their outstanding stock when there were such earnings, the stock would have all been redeemed and all the extensions would have been paid for out of earnings on January 1, 1912, with the exception of $5,000,000 of bonded debt. The method of computing this may be illustrated by the first three years of the Company. In 1881, when no dividends were paid on the $500,000 of stock, 10% allowance, or $50,000, would on this theory be added, making the claim of the stockholders $550,000 on January 1, 1882. Ten per cent, on this, or $55,000, that year would raise the claim to $605,000, less the dividends actually paid of $148,000. This leaves the net claim against the public on this theory of $457,000. In 1883 an allowance of 10% on this, together with $100,000 of new stock for money put into the plant, makes the total claim $602,700 less $220,000 actually paid in dividends, or a net claim December 31, 1911, of $382,700. In this way the property would have all been paid for by 1887 and no stock would have been needed again until 1901, and that stock would have finally been canceled with 10% thereon before January 1, 1912. These computations are not given here for anything more than an illus- tration of the profitableness of the business. It is only under municipal ownership, when well managed, that profits above 4% to 5% interest on the bonded debt are devoted to retiring the debt and thus capitalizing the business. The total dividends paid by the Chicago Telephone Company, from 1881 to the close of 1907, when the present ordinance went into effect, were $16,951,765. This was an average of 12.66% of the sum of the average outstanding stock of the several years. Had the addition of $1,000,000 to the stock in 1900, without any direct payment therefor by the stockholders, been omitted from the calculation of average stock outstanding, the dividends would have averaged over 13%. 36 TABLE 12. APPRAISAL OF PHYSICAL PROPERTY AND REJECTED ITEMS. City and Description. City. Suburban. Rejected working capital $ 168,989 $ 221,596 Rejected paving 628,262 628,262 Rejected overhead 1,268,696 1,757,684 Total rejected $ 2,065,947 $ 2,607,542 Appraisal new 34,325,894 44,898,103 Value new less rejected items 32,259,947 42,290,561 The rejection of the above items and of the items of plant development and the cost of developing the business reduces the appraisal of the property new to: City and Suburban property, $42,290,562 City property only, 32,259.947 The rejected paving item of $628,216, laid since the conduits were put in, belongs entirely to the city portion of the plant. The rejected part of the work- ing capital has been apportioned to the city in the same percentage of the whole (76.26%) as is the proportion of the entire city property, aside from cash and its equivalent, to the total. Present Value. The last two of the nine large volumes of the appraisal are devoted to the determination of the present or depreciated value of the physical property. No depreciation is recognized in the items of "plant development" and "cost of developing the business." Following a common practice, no depreciation is found in land or construction in process, or such part of the working capital as is represented by cash or fluid assets readily converitble into cash. The other 90% of the physical prop- erty is depreciated by the appraisers 77.28% in the city and 76% in the entire system. The method taken may be briefly examined. Life. The appraisal gives two columns of estimated life. In one column, known as b, the appraisers take an estimated life for each portion of the property based on its probable duration, if affected only by wear and not at all by obsolescence or inadequacy, or other causes. In the second column, known as a, they take a shorter estimated life, based on conditions of obsolescence, inadequacy, etc., which have been observed in Chicago and similar large cities. Column b is called a life "due to age and wear only," and column a is called a life "due to service." In the table following, three columns are added to include the estimates of the Chicago Telephone Commission, of D. C. Jackson, Win. H. Crumb and Geo. W. Wilder, in April, 1907; the estimates of Westinghouse, Church, Kerr & Co., in their report in March, 1911, and the estimates of- E. L. Cline, in Telephony, July 2, 1910. 37 TABLE 13. LIFE. Description. Byllesby and Arnold $ Chicago Commission j> *i E oo 3 oo Years. O . ='o " ,J O b Due to age and wear and tear only. Years. a Due to all forms of de- preciation. Years. Buildings 60 to 100 30 to 60 40 50 50 16 2-3 8 15 10 12 to 15 8 10 10 15 10 10 10 50 50 50 Unknown 18 20 20 25 14 15 20 12.5 15 17.5 15 10 to 14 10 15 10 to 19 15 40 40 15 15 30 20 15 Central office equipment Private branch boards.. 25 15 to 20 Substation apparatus. . . . . . . 20 Clay conduit lines .... . . Indefinite Underground cable, main toll . . . and sn Underground cable subsidiary 35 Aerial cable 25 Poles and cross-arms. . IS Copper wire, long distance and toll lines 25 Copper wire exchange lines. 20 It will be observed that Byllesby and Arnold in Column a assumed a longer life for central office and sub-station equipment and a shorter life for conduits and cable than do the others. TABLE 14. SALVAGE. Byllesby & Arnold a # . o E OH q o |M b a EH 01 a Description. Age and All forms al we a ^ M '-0 A 6 . ^ wear only of deprec- ;I Q X -f-^. f-^. 0) O Q iation. ^ Buildings 000 Central office equipment. ) Central battery / 20 20 20 Private branch boards ... 10. 5 20 15 20 Substation apparatus .... 10. 5 10 15 City conduits 000 Underground cable main. 1 to 37 35. 2 40 40 40 Underground cable sub- sidiary to 39 10. 4 40 40 40 Aerial cable 2 to 35 19. 7 40 30 40 Poles and cross-arms.... to 20 Copper wire . 40 45 70 50 . 70 38 Byllesby and Arnold estimated less net salvage (column a) than do others. The net salvage allowed on some parts of the property is here given: 10.46% Sub-station equipment, Underground cables, mains, Underground cable, subsidiary, House cable, Aerial cable, Aerial wire, 35.67% 9.57% 4.55% 19.54% 29.32% TABLE 15. ANNUAL DEPRECIATION. Percentage of Cost. Byllesby and Arnold Chicago Telephone Westing- Description. b Age and wear only. a Company, house E. L. All forms of Sinking Church Cline. depreciation. Fund. Kerr & Co. Buildings .1 to 2 1.5 to 2 6.00 6.67 6.67 2.00 5.50 7.00 8.00 6.66 6.50 1.33 11.25 11.25 8.73 .89 3.72 5.38 5.38 8.73 5.38 2.0 5.3 8.5 2.0 3.0 4.0 6.6 2.5 2 8 8 1 2.4 3 4 4.2 to 11.25 2 Central office equipment. Private branch board. . . . .3.8 .5.0 Sub-station apparatus . . . Clay conduit lines .5.0 .0.0 Underground cable .1.26 to 1.98 Underground cable subsid- iary 2 03 tn 2.85 Aerial cable .2.60 to 3.92 Poles and cross-arms... Copper wire .4.16 to 5.55 .2.4 Byllesby and Arnold estimate (column a) less depreciation yearly on central and sub-station equipment and more depreciation on underground and aerial con- struction than do the others. Applying the above percentages of depreciation, based on the age, salvage and assumed life of the several parts of the telephone property, the appraisers reached the following results: TABLE 16. DEPEECIATED OE PRESENT VALUE. Description. Citv. City and Suburbs. Total reproduction value new, including land and work- ing capital $34,325,894 $44,898,103 Present value "b" on the basis of age and wear only. 29,838,803 38,201,873 Percentage to value new 86.58% 84.73% Present value "a" on the basis of obsolescence and inadequacy and other conditions of actual service in Chicago 27,312,425 35,073,692 Percentage to value new 79.03% 77.59% According to the books of the Company, the total cost of the property in the city and suburbs on August 1, 1911, amounted to $36,852,122.15, or, with a proper allowance for cash and its equivalent, about $37,700,000. From this, how- ever, $419,373.66* should be deducted for property that was scrapped before *$1,502.28 was deducted by Hall on Buildings. 39 December 31, 1911, or more properly the $366,280.69 scrapped before August 1, 1911, -which, by an oversight, was not noted in the books (Hall's Eeport, page 14). This would leave the cost, according to the books, about $37,300,000. The present value of this property would be determined by deducting the amount at the credit of the depreciation reserve August 1, 1911. The addition to the reserve for the year 1911 was slightly over $1,200,000, or approximately $700,000 for the seven months. This added to the $3,700,000, December 31, 1910, gives $4,400,000 contributed by the telephone users up to August 1, 1911. The present value, according to the books, is therefore $32,900,000, which confirms the value found below from the appraisal, viz., $32,813,246. If we apply to the appraisal new less the items rejected in the present report, the same precentages of depreciation as were used by Byllesby and Arnold for all items, namely: 20.432% for the city and 22.41% for city and suburbs, the present value of the conceded items of the appraisal new of $32,259.947 within the city and $42,290,562 in the city and suburbs will be: Conceded present value in city, $25,495,036 Conceded present value in city and suburbs, 32,813,246 It also appears that the corrected present value for the entire property to August 1st, of $32,813,246, is nearly equal to the $33,000,000 of stocks, bonds and loans from the banks on December 31, 1911. By that date, however, the addition of $2,095,270 to the physical property during the last five months of 1911, brought the value of the physical property on the above basis to $34,908,516, or in round figures, $35,000,000. This is $2,000,000 more than the investment by the stock and bondholders and the banks on the date in question, December 31, 1911, and is substantially equivalent to the non-interest bearing liabilities. Possibly a more exhaustive examination of the appraisal might make such further reductions as to bring the value on December 31st down to $33,000,000. On the other hand, the Company might succeed in showing that too much has been rejected in the above computations. The important point in this particular matter is that through the rise of land values, the increase in the cost of labor and materials and the investment of reserves of $5,091,000 collected from the telephone users, the plant on December 31, 1911, was worth about $2,000,000 more than the outstanding stocks, bonds and obligations to the banks. These three items, aggregating $33,000,000, repre- sent the investment of capital in the Company. Prior to 1891 the dividend rate was always 30% to 51%. During that time $494,352 of new stock was subscribed for from the dividend, or was allotted to the stockholder simultaneously with the payment of the dividends. Stock dividends of $1,000,000 in 1900, and of $4,500,000 in 1908, were issued to repr- sent surplus earnings that had gone into the plant, in addition to the regular dividends which, prior to 1908,, had never been under 10%. Since these stock dividends of about $6,000,000 out of the existing $27,000,000 of stock represented actual investment in the property, even though paid for by the telephone user, the present stock, as well as the bonds, represents actual capital rather than what is usually meant by "water." The question of how the capital was secured has more importance when the present 8% dividend rate is considered. In addition to expenditures for maintenance that have gradually declined from 10% to 7.4% of the average depreciable investment, $5,000,000 appears to have been necessary to keep the investment intact through the past 20 and more years. This, however, is far from establishing the propriety of collecting over 40% of this, or $2,241,141, during 1910 and 1911. The fact appears to have been that substantially all the surplus earnings above 8% on the stock during the past two years were added to the surplus. It was legal, and it may have been a wise and proper atonement for the neglect to do this in the past, or for transferring from reserve to surplus and distributing, as a stock dividend, in 1908, $4,500,000 previously accumulated to meet depreciation. The actual treatment of the subject on the books of the Company was not sufficiently scientific to be a guide in adjusting rates for the next five years. 40 Depreciation in New and Old Plants. In a new plant which has not yet reached its "gait" of renewals, a deprecia- tion reserve appears desirable. In the case of a company as old as the Chicago Telephone Company, the time may soon arrive when renewals will take sufficient care of depreciation, as in the case of our older gas companies and railroads. A depreciation reserve has thus far been needed by the Chicago Telephone Company. Methods of Building Up a Depreciation Reserve. Where, as is usual in telephone companies, a depreciation reserve is invested in the plant itself, there are two methods of determining the amount needed from year to year to reach the fixed amount at the end of a definite period. Both methods start with an assumption of the probable life and of the value new of each class of property that is subject to depreciation. The sinking fund method shows what percentage new must be put into a fund at an agreed rate of interest, usually 4%, in order, when compounded, to reach the full value at the end of the estimated life of the property. Of course, the only loss to be made up by the sinking fund is the difference between the cost new and the net salvage. By net salvage is meant the value of the property when scrapped, less the cost of its removal and sale. Having thus determined the percentage of depreciation to be applied in any given year to each class of property, the amount of depreciation in dollars is computed. Then the addition of these various sums required for the sinking fund gives the total amount to be apportioned that year to the depreciation reserve. The amount will vary from year to year and is a complicated method to apply to the bookkeeping of the past. It is of easier application when applied to the prop erty today as an estimate for the future. In the case of the Chicago Telephone Company, the appraisal just made shows that the actxial excess of depreciation over appreciation in the past thirty years has been about $5,000,000. One can determine what uniform per cent, of the average investment of all the depreciable property would have been necessary within the last 21 years, in order to reach at 4% compound interest this $5,000,000. One per cent, yearly on the average depreciable investment since 1890 at 4% would have yielded $3',465,860.91 in 1911. To have secured $4,000,000 by this method would have required 1.151%; to have secured the actual amount accumu- lated, of $5,091,000, would have required 1 469%. The other method of reckoning the depreciation, one apparently in universal use among telephone engineers, is the so-called straight line method, where interest and the compounding of the same are disregarded. The difference between the cost of the property and the net salvage in other words, the true depreciation, is equally divided by years over the as- sumed life of the class of property in question. The amount yielded in this way by 1% yearly of the average depreciable property of the Chicago Telephone Com- pany since 1890 is $2,731,977. To accumulate $4,000,000 in 1911 by this method would, therefore, require 1.464% a year. To accumulate $5,091,000 would require 1.8635%. A yearly addition to the reserve of 1.5% would yield $4,097,966. A yearly addition of 1.86% would yield $5,081,477. If the first method, or sinking fund, is applied to the past history of the plant, the rate of return must be reckoned upon the first cost new of the property in use. If, however, the second or straight line method be used, the rate of return but not the depreciation should be reckoned from year to year on the depreciated value of the property. An illustration will make this latter point clear. Suppose the property cost new $100,000, and that 7% be assumed as a fair return on the investment, but let it be further assumed that the property will last only 33 -J years, and therefore will require 3%, or $3,000 a year, without interest, to make good the depreciation. Besides enough for operating expenses, the users pay $10,000 to the company the first year. Of this amount, $7,000 is profit and $3,000 makes good the depreciation. If the company is a growing one, it will need even more than $3,000 for extensions, which it will pay for. in part, with the above $3,000 furnished by its customers, and in part through further stock and bond issues. If $4,000 were 41 needed for extensions during the first year and $."5,000 were paid in by the customer, the real capital at the beginning of the second year would be $101,000. If no addition to the investment were required, the capital would be $97,000, and the company would have $3,000 to put into similar investments elsewhere. If the company could not get 7% elsewhere, that would indicate that the rate of return to the company in question had been put too high, since the rate of return should represent, as nearly as possible, what investors demand and get in similar invest- ments under similar conditions. The objection may be raised that if the property were a stagnant one the rate of return each year, say 7%, would be on a reduced capital and therefor the rates would fall as compared with a new investment of similar character elsewhere. This is of slight importance, because the problem is the determining of what is just in each community. Under this theory, of course, if a stagnant plant begins to grow rapidly, and a large amount of new capital were called in, or if the plant were entirely rebuilt, there might have to be a temporary increase of rates, but that, under a system of public, regulation and publicity of accounts, could be allowed. Such suppositions, however, of stagnant plants, have little application to most municipal utilities and no application to the Chicago Telephone Company. In the case of the latter company, another argument is raised. This plant for the present may be assumed to have cost the security holders that is the stock, bond and note holders $33,000,000, and to have cost the telephone subscriber $5,000,000 for a depreciation reserve. The Company claims that it has had the burden of investing and caring for this $5,000,000 of depreciation reserve, which has been put into extensions, and should have a reward for the same. To this it should be replied, first, the salaries of all the officials and managers that supervised these extensions have been paid out of operating expenses and will be so paid in the future. Second, the security to the stockholders has been increased by this depreciation reserve collected from the subscriber and put into extensions. Third, if the depreciation reserve had been placed in an outside sinking fund, the owners of the property would have had to put their hands into their pockets for the extensions which have been paid for by the subscribers, while the total value of the telephone property would not have been changed thereby, and the investment in the sinking fund would have been scarcely more secure than the investment actually made in extensions. The straight line method will be followed in this report, and the yearly depreciation will be taken from the cost new of the depreciable investment. Maintenance and Depreciation in Other Bell Companies. The experience of the entire group of Bell companies with their 4,474,171 stations in use at the close of 1911, should be observed. The percentage of station removals, maintenance and depreciation to the entire investment in telephone property was given in the last report of the A. T. & T. : 1895 9.1% 1900 8.4% 1905 8.9% 1910 9.5% 1911 9.2% In Chicago and suburbs in 1911, when the average depreciable property of $33,277,902 was 89.47% of the total property of $37,194,588, 9.2% of the entire property would be 10.28% of the depreciable property. But this 9.2% in the other Bell Companies included station removals. This item in Chicago in 1911 was $730, 107.20, or 2.194% of the average depreciable property, but was only 1.85% in 1910, and apparently will be about that figure in 1912. A reduction of 1.85% from 10.28% would leave 8.43% of the depreciable investment as applicable to maintenance and a depreciation reserve in Chicago, outside of station removals, if the average of all the Bell Companies, save the long distance lines, were to prevail here. If the long distance lines be included, there is data from the last three reports of the A. T. & T. for a more detailed comparison, as follows: The last report of the American Telephone and Telegraph Company gives not 42 only the telephone plant in use on December 31, 1911, of $666,660,702 (p. 13) for the entire Bell system in the United States, but it gives the plant additions for each of the previous 12 years. (Eeport, p. 5.) The working capital is omitted, but land is included in addition to the depreciable property. The report also states (p. 6) : "During the year $58,840,000 was applied out of revenue to maintenance and reconstruction purposes; of this, over $12,000,000 was unexpended for those pur- poses. "The total provisions for maintenance and reconstruction charged against revenue for the last nine years was over $342,300,000." From this data the following computation is easily made: TABLE 17. MAINTENANCE AND DEPEECIATION EXPENSES AND EESERVES OF ALL BELL COMPANIES, INCLUDING LONG DISTANCE LINES. Description. 1910. 1911. Average plant investment, including land, but not working capital, of all Bell companies $584,208,500.00 $638,830,314.00 Ditto for Chicago Telephone Company 30,451,278.00 33,883,648.00 Other Bell companies 553,757,222.00 604,946,666.00 Total maintenance, station removals and deprecia- tion reserve 52,028,009.00 58,850,350.00 Percentage of maintenance, station removals, and depreciation reserve to average plant invest- ment, including land but not working capital in all Bell companies 8.91% 9.21% Maintenance, station removals and depreciation of Chicago Telephone Company 3,888,533.00 4,228,221.00 Percentage of maintenance, station removals and depreciation reserve in the Chicago Company to its average plant investment, including land 12.76% 12.48% Maintenance, station removals and depreciation in other Bell companies after deducting Chicago. . 48,139,476.00 54,622,129.00 Percentage to plant investment and land in these other companies 8.69% 9.03% In the above computation, the investment of the Chicago Company, as it appears on the books of the company, is used. If the property ($417,871.38, Hall, page 14) that was scrapped before the close of 1911, had been deducted from the Chicago investment, the contrast would have been slightly increased. As it is, however, the other Bell companies are spending only about 9% of their entire investment outside of their working capital for both maintenance, station removals and yearly additions to their depreciation reserves. The Chicago company, on the other hand, is spending or setting aside about 12y 2 % for the same purpose. Some allowance may be made for the increased cost of station removals here, but a difference of even 3% when applied to the investment of the Chicago company for both city and suburbs in 1911, would amount to about $1,000,000 and to the city alone to about $750,000. 43 TABLE 18. MAINTENANCE, EECONSTEUCTION AND PLANT INVESTMENT OF ALL THE BELL COMPANIES, 1903-11, INCLUSIVE. Provisions for Average Maintenance and Year. Plant Dec. 31. Plant for Year. ^Reconstruction. 1902 $250,205,302 1903 285,574,002 $267,889,652 1904 319,010,702 302,342,352 1905 369,791,602 344,401,152 1906 449,158,502 409,475,052 $ 30,639,200 1907 502,079,902 475,619,202 34,665,700 1908 528,717,102 515,398,502 37,204,200 1909 557,417,202 543,067,152 44,838,953- 1910 611,000,002 584,208,600 52,028,009- 1911 666,660,702 638,830,352 58,840,354 Total $4,081,232,016 *$342,300,000 *The total for the nine years is given in the recent reports of the A. T. & T., but the separation between the first three of the years is not shown. The report for 1911 gives the provision for maintenance and reconstruction, and the total for the nine years, 1903-11, but reliance is had upon the previous reports for the amount for some of the years covered by the total. The entire provision for maintenance and station removals and to meet depreciation during the last nine years for all the associated Bell companies of the United States, has been only $342,300,000 or 8.387% of the aggregate of the average investments during those nine years of $4,081,232,600. An appraisal of all these Bell plants in 1907 gave a value to these properties of $35,000,000 in excess of the obligations outstanding against them. If a main- tenance, station removal and depreciation reserve expense of 8.39% can do this elsewhere, it might seem sufficient in Chicago with its large proportion of long lived investment. At least 8.5% would appear sufficient for maintenance and depreciation reserve, if station removals be separately allowed in Chicago. Commenting on this situation, President Vail, in his report for 1908, wrote: ' ' The result of the appraisement and studies on depreciation, given below, establishes the fact that our charges against revenue for maintenance and re- construction are conservative and on the right side. * * * "There exists much misunderstanding as to the permanent value of a modern telephone plant. Originally, exchange plants were open wire construction, largely on house-top fixtures and to a certain extent, on poles. The central offices were in leased buildings, seldom fireproof, the equipment was of various types and standards, due to the rapid improvement or development then taking place. "Now the central offices in all the principal centers and in many of the less important are in fireproof buildings built for the purpose and owned by the companies. "From these offices radiate the underground conduits connecting the central offices with each other and the various districts of the exchange territory. Through the subways the wires are run in cables of copper wire, sheathed with lead covering. The extensions of these lines are open wire, generally copper, or aerial cables strung on pole lines of substantial construction." Commenting upon this matter again in his report for 1910, President Vail made the following significant statement: "The present policy of the Bell system is to provide against every probable contingency and to base the amount and extent of such provision on past expe- rience not on future expectations. It is conjectured that the future will show a decrease in the depreciation or reconstruction due to decay, wear and tear, and obsolescence. Changes improvements are going on as rapidly as in the past, but the general character of plant and methods is assuming more permanency. The improvements are being evolved from, and are being grafted on to, the old 44 system and methods. The disturbing and sometimes seemingly destructive condi- tions following the rapid development of high pressure power and transmission have been to a great measure overcome. "All this has been made possible through the unremitting study and research of the staff of the engineering and experimental departments of the company, who by close attention, observation and study, anticipate and provide for all such contingencies and conditions as can possibly be anticipated or provided for in advance. "Under these conditions there is a small probability that any such causes as those which forced the wholesale reconstruction or rearrangement of plant in the past will again occur; it is, however, for the benefit of the public and of the corporation to have an ample reserve for any contingency which may hap- pen." That the Chicago Telephone Company has pursued the same conservative policy as the other Bell companies is indicated in the report of the then president of the company, John M. Clark, in his annual report for 1900. He then said: "This company has aimed to keep fully up with the improvements that are continually being made in apparatus and in methods of handling the business. In fact, some of the most important of these have been made by electricians and experts in the employ of this company. "The expenditures have been largely increased not only by the growing cost of operation, but also through the necessity of replacing old switchboards and apparatus with new and improved equipment, in order to maintain the quality of the service at the highest modern standard. New switchboards and apparatus were installed during the year, costing $282,160.38." It is, moreover, interesting to note that such well established independent telephone companies as the Tri-State of Minneapolis, Keystone of Philadelphia, Kinloch of St. Louis, Federal of Buffalo, and the Kansas City Home Telephone Company, are devoting less than 8.5% yearly of their plant investment to main- tenance and depreciation. That the entire Bell system has so completely taken care of depreciation with a total expenditure of 9% of the plant investment for maintenance, including renewals, and for station removals and for additions to the depreciation reserve investment as compared with over 12% here during the last two years, is significant. The fairness of the above comparison is strengthened by tbp fact that all the Bell companies, including the long distance lines had in permanent underground conduit only 53% of their entire mileage of wire in December, 1911 and outside of Chicago only 51%, while the Chicago Telephone Company had 81% in under- ground conduits. This would naturally mean that the maintenance expenses would be somewhat larger in the average Bell telephone company than in Chicago. Real estate and underground conduits and cables, which constitute the most permanent portion of the /telephone plant, were given in the 1908 annual report of the A. T. & T. Co., as amounting to only 29% of the total value of the telephone plants owned by that company; that is, the entire Bell system. According to the appraisal of Byllesby and Arnold, this portion of the plant of the Chicago company constitutes 39.5% of its entire investment. Rate of Return. Any one familiar with the numerous decisions of rate commissions is aware of how uncertain and vague are most of their expressions upon the proper rate of return. The courts have been inclined to uphold any rate which yielded from 4% to 6% return. Their theory has appeared tcr be that if the rate was as high as bonds were netting the investor in the locality, which was usually from 4% to 5!/4%, the rate was not confiscatory. State commissions have held to a higher rate. New securities in the lighting business in Massachusetts, however, have been ordered by the State Gas and Electric Light Commission to be sold at such prem- iums as to net the investor only 5% to 6%. In the case of a large, old and well established enterprise, like the Chicago 45 Telephone Company, the proper test would appear to be such rate of return as would render possible the sale of additional stock and bonds when needed from time to time for extensions. In the other words, the rate should be such as to keep the securities at par, or slightly above. The market for the securities of a well-known company is highly competitive. If investors are willing to buy stock, on a 6% basis, and the company insists upon paying 8% dividends, the investors will quickly run up the price to such an amount, say 133J, as will net the investor only 6% on what he pays for the stock. We may argue that the business is such that the investor ought to have 8%; but the investor, having his own opinion on the subject, insists upon buying on a 6% basis, or whatever may be the actual market quotation. Applying- these observations to the local telephone situation, we find that during 1911 the Company had outstanding $5,000,000 of 5% bonds, which have been constantly sold above par since their issue in 1908. Furthermore, the Company during the present year has made another issue of $14,000,000 of such bonds, which are also selling above par. Its $1,000,000 of loans from the banks were obtained at 4% to 4%% interest. The $27,000,000 of 8% stock sold at 120 to 130 during most of the three years prior to the exchange of nearly all of that which was owned by the minority stockholders in 1911, for the 8% stock of the A. T. & T. The 8% stock of the latter company has been selling for some time at 140 to 144; yet this is in the face of the announcement in the last report of the A. T. & T. that on its capital and that of the associated Bell companies it will not hereafter expect or encourage more than 8%. Now an investor in an 8% stock at 140 nets on the investment only 5.71%. Even at 130 he only nets 6.15%, and at 125 he nets 6.4%. An investor content with 6.5% return would only pay 123 for the stock. Since the stock has been above that price most of the time during the last three years, it may be inferred that the investor in Chicago Telephone Company stock not only does not ask a return of 6.5% on his actual investment in order to buy it, but that in the bidding of the competitive market he forces up the price so that he cannot make 6.5%; in fact, by forcing the price above 133, as has been the case recently, the investing market makes it impossible to realize even 6%. To all this it is urged that the stock, at least of the local company, is more precarious than the stocks of the local gas or electric light companies, because of the existence of competition from the Illinois Tunnel Company. That competition has not been serious thus far, and the investor, judging from the above named market quotations, evidently does not expect it to be; neither do the officers of the Chicago Telephone Company express any fear from that source. Of more force is the claim that stockholders may pay more for stock in expectation of occasionally having a chance to buy new stock issues at par. In view of all these facts, it would seem as if 6\<>% to 7% were as reasonable a rate of return for Chicago telephone stock as for the Consolidated Gas Company stock of New York, with reference to which a 6% return was considered reason- able by the United States Supreme Court in January, 1909. Again it is urged that the City has the right of purchase at the appraised value at the end of the grant, or at 5% in excess of the appraised value on January 1, 1919 and 1924, and the City may transfer its right on the latter date. As long, however, as the Company gives good service and is not overcapitalized, it seems to have little to fear in this direction. Certainly an appraisal on the basis of that of Byllesby and Arnold would involve a payment to the stockholders of a large premium in case of city purchase. The stock outstanding was increased in 1908 from $22,500,000 to $27,000,000, without any contribution from the stockholders. To be sure, the dividends were reduced at the same time from 10% to 8%, the total annual dividends remaining about the same. The increase of stock has been defended by the Company on the ground that the accumulations from the subscribers to meet depreciation were not found to be needed for that purpose, but represent surplus earnings, which could be capitalized. Whatever be said of that procedure, the fact stands out that a stockholder possessed of 2214 shares early in 1908, became a possessor a little later of 27 shares. Now a dividend of 6% on 27 shares is equivalent to 7.2% on 22% shares. 46 Similarly, a dividend of 6.5% on 27 shares is equal to 7.8% on 22% shares, and 7% on 27 shares is equal to 8.4% on 22i/ 2 shares. Since, however, with the addition of the $4,500,000 the outstanding securities of the Company appear to be no greater than the value of the physical property, a return on the stock of 6.5% to 7% may be reasonable. In all this it must be emphatically asserted that a return of 6.5% to 7% is not here considered as a fair return in the early days of the Telephone Company, when the risks of developing a new art were great. As is elsewhere shown, the returns in those early days were fully commensurate with the risks assumed. The problem before us now is not so much an ethical problem of what a company ought to receive as it is what return, as a matter of fact, will tempt the investor to furnish the money needed for the growth of the business. If the lessons of the stock market point to 5% on bonds, and to 6.5% to 7% on stock, as sufficient for this purpose, in the case of the Chicago Telephone Company, then such a rate of return is reasonable. On December 31, 1911, there were 4,474,171 telephones in use among the Bell companies in the United States. Of this number, only 38% were managed by companies paying 8% dividends. Outside of the New York and Chicago com- panies only 11% of all the telephones were in the hands of the companies paying 8%. No companies paid over 8%, or, so far as can be learned, any amount between 7% and 8%. Three companies in New England and the Rockies paid 7%. About half of all the telephones in the country were owned by companies paying over 6%, but only 23% were owned outside of the New York and Chicago companies. The companies controlling the other half of the Bell system and located largely, like the Central Union, in districts especially subjected to competition from the independent companies, have paid no dividends, or not to exceed 6%. These and the other facts at hand lead to the conclusion that the 8% dividends from a few of the Bell companies, notably New York and Chicago, together with the 4 1 /4% payment on gross receipts from all the companies, and the profits of the long distance business, help the A. T. & T. to carry some of the companies that are competing with the independent companies, or are having other difficulties. Whether the Chicago company should thus collect from the subscribers here to support the parent company, which has always owned over half of its stock and which receives all of the 4%% payment on gross receipts for the benefit of the stockholders of the National Company, or for the benefit of .the telephone system elsewhere, need not here be argued. Possibilities of Reduction. It has appeared that operating expenses should not include more than $1 per telephone for payments to the National Company. It has also been shown that the station removals are very high, but that in 1912 they were beginning to fall. The repairs, which averaged about 6.5%, 1904-7, fell to about 5.5% during the next four years, 1908-11. The average, however, of all the Bell companies last year, was under 4% of the investment. It was under 4% also in the largest cities outside of Chicago. Local conditions may prevent for awhile a further reduction here, but it is reasonable to suppose that the present 5.5% will approach 4.5% and the station removals, which are now about 2% in the city, will decline to 1.5%. The entire expenditure for repairs, renewals, station removals and additions to the depreciation reserve is over 13% of the average investment in the city, as compared with 8.5% to 9.5% on the average elsewhere. Eepairs and renewals have been steadily falling from about 9.5% twenty years ago to 7.39% the last three years, ending with the close of 1912. The appraisal has shown that a further expenditure of 1.86% annually of the property subject to depreciation would result in the accumulation of the $5,091,000 actually collected Furthermore, this amount still leaves the investment intact, although about $10,000,000 of the appraised values of Byllesby and Arnold were rejected. If this $5,091,000 of depreciation in the property had been accumulated by setting aside yearly a percentage that should decline with the decline in maintenance, then the 47 percentage would have started during the seven years, 1891-7, with 2.77%, would have fallen during the next seven years, 1898-1904, to 2.06%, and during the last seven years, 1905-11, would have fallen to 1.66%, with every prospect of a further decline below 1.5%. From this point of view, one could estimate the repairs and renewals, known as maintenance, at about 7.4%, or at the most 7.5%, during the next two years, with a further addition to the reserve fund of 1.5%, making a total of 9% for mainte- nance and depreciation. This is aside from the expense for station removals and changes, which keep the installation of wires and fixtures inside the subscriber's premises intact, and practically free from depreciation. The matter may be approached from another point of view. We may assume that the average repairs for the next five years will be 5% and the amount neces- sary for the depreciation reserve 1.5%, making a total for these two items of 6.5%, with a possibility of 7%. There remains the problem of renewals. From figures prepared by the Company it appears that with an average life gradually increasing from twelve years in the 90s to nineteen years now, and with a very moderate rate of growth, giving an investment of $103,000,000 in 1930, the renewals for the next five years, 1913-17, would average 1.78% of the depreciable property, and during the following thirteen years, 2.88%. The addition of 1.78% for renewals to the 6.5% to 7% already mentioned for repairs and depreciation reserve would give 8.28% to 8.78% for repairs and renewals and for an addition of 1.5% yearly to the depreciation reserve. During the remaining thirteen years the repair item might be estimated at 4.5%, which is still much higher than in other companies. This, with 1.5% for the reserve, and 2.88% for renewals, would be 8.88%. The Telephone Company does not accept as long a life today as nineteen years. The appraisal, however, used estimates of life which amount to a composite life on all the property of almost exactly nineteen years, viz., 18.961 years. It seems certain that the whole tendency in the Chicago plant is toward reaching in a comparatively short time the age adopted by Byllesby and Arnold, if that time has not yet been reached. Byllesby and Arnold find that the average depreciation allowance on a straight line basis is 4.068%. If, however, they had taken the allowances for salvage which have been found by the Chicago company to be applicable to its condition here, the salvage would have been raised from 22.862% to 29.234%, and the annual depreciation and renewal allowance on a straight line basis on all the plant in service, including land, but not including working capital, construction in process, tools, teams, furniture and fixtures, would have been reduced to 3.732%. With the almost certain continuance of the increase in cost of labor and materials and of other increments of value that are often allowed in appraisals, the rate of depreciation and renewals may be kept down to between 3.5% and 4%, as we have seen has been the experience of the last twenty years. Everything points to an allowance for maintenance and depreciation of 8.5% to 9.5%. At 9% the Com- pany could continue to pay 5.5% for repairs during the next five years, meet all renewals that would come on the assumption of a nineteen-year life, such as was used by Byllesby and Arnold, and would have 1.72% for a depreciation reserve or other extraordinary expenditures, or almost as large an amount as the 1.86% of the last twenty years. As already observed, this percentage might well decline with the decline of the maintenance account and be taken at 1.66% during the past seven years. With the data at hand and the conclusion already reached above, the operating expenses in the city for 1911 might be thus treated: 48 TABLE 19. EEVISED EXPENSES AND PROFITS WITHIN THE CITY IN 1911. With Maximum With Minimum Description. Expenses. Expenses. Operating expenses $ 7,584,289.80 $ 7,584,289.80 Excess payments to A. T. & T. Co 191,818.00 Expenses less excessive rentals 7,584,289.80 7,392,471.80 Expenditures for repairs and renewals 1,836,506.60 1,836,506.60 Expenditures less repairs and renewals 5,747,783.20 5,555,965.20 Add for corrected repairs, renewals and deprecia- tion 2,395,976.35* 2,266,464.12f Revised expenses : 8,143,759.55 7,822,429.32 Receipts 10,410,770.59 10,410,770.59 Profits '. 2,266,011.04 2,588,341.27 Conceded profits 1,765,995.00$ 1,513,710.0011 Remaining profits 501,016.04 1,074,631.27 Contingencies and surplus 150,000.00 100,000.00 Possible reduction in rates aside from considera- tion of claims for extraordinary depreciation 351,016.04 974,631.27 *At 9.25% of average depreciable property new of $25,902,447. f At 8.75% of average depreciable property new of $25,902,447. JTaken at 7% of $25,228,500, the latter being equivalent to such a per cent, of the $6,000,000 of bonds and notes and $27,000,000 of stock as the total of appraised property in the city, new, was to that in the city and suburbs. ^Estimated at 6% on $25,228,500, the city portion of the property. The above figures do not take into account the claims for extraordinary de- preciation brought to the writer's attention during October, in which month the report was being put into final shape. Attention will be given to it in the pages immediately following. Aside from that item the conclusions from the above table would be that a reduction in the telephone rates of about $700,000 could be fairly made. Toll Earnings and Expenses. All the expenses of the toll business in the city are included in the operating expenses of the city exchange. The toll revenues include all the money appor- tioned to the city by the Company. A careful investigation of the subject by Mr. Hall, confirms this apportionment, which is like that made by Arthur Young & Co., accountants, to the Comptroller of the City of Chicago, Walter H. Wilson, February 9, 1911 (Hall, pages 50-1). The general principle guiding the apportionment of earnings is the assignment to the city of the usual commission to the office originating the call, together with the apportionment of the balance of the receipts on a mileage basis. Municipal Requirements. An important source of extraordinary expense to the Telephone Company in the past has been municipal requirements. First came the elevation of the steam railroads, with large expenses required of the Telephone Company in the relocation of its wires. Then came various city ordinances, requiring the removal of poles from the streets in all but the outskirts of the city. The expenses for these purposes have been included in the maintenance account, which has shown such n downward trend in the last 20 years. The relocation and burial of the wires have diminished the expenses for maintenance. Now the Company claims that it may be called on during the next five years to change all of its conduits in the streets where subways have been recommended. These streets are given in the joint report of the Harbor and Subway Commission, and the sub-committee of the City Council Committee on Local Transportation, 49 September 10, 1912. Along the 56 miles of subway recommended to be built during the next five years the Company claims it will lose, in the value of abandoned conduits and cables, $1,840,000, and another $250,000 in temporary work during subway construction. After explaining the necessity for abandoning not only conduit lines in the streets to be occupied by the subways, but also "certain subsidiary intersecting underground conduit and cable leads that now cross the proposed subway, the Company estimates that the loss on the underground conduit upon which there will be no salvage will be $1,165,000, and the loss upon the cable after deducting its salvage value will be $675,000. Since the proposed subways will practically cut many of the exchange districts in halves, the maintenance of sufficient crossings to give service to all subscribers is estimated to cost $250,000. These estimates are based on the present telephone plant." The Company asserts that on account of the installation of several large sized telephone cables each year, the cost above mentioned on account of subways will be increased $100,000 a year for every year of postponement of subway construc- tion. While personally a believer in subways for Chicago, it does not appear to the writer likely that the subway program will be sufficiently advanced to require, within five years, an expenditure by the Telephone Company of more than one- fourth of this $2,090,000, or say $500,000. Surely no more than this will be required during the first three of the coming five years. Any excess above this, if there be such, during the last year or two of the period, might be considered so extraordinary as to justify its temporary capitalization. In this connection it may be noted that when the subway plans had not been developed on so large a scale as shown by their latest report, the chief engineer of the Chicago Telephone Company wrote, on March 27, 1912, that a comprehensive system of subways would involve a loss of $2,300,000 to the Telephone Company. He wrote: "We find, however, that the plans for immediate subway construction now being considered by the Subway Commission will involve only our plant on Harrison street, between Fifth avenue and State street, on State street, from Harrison street to Eandolph street, and on Randolph street from State street to Fifth avenue, and a few crossings at other locations. The value of telephone plant which will be destroyed by the subway work, involved in these plans is at least $200,000. ' ' That, you may get some quantitative idea of the problem, I would advise that we will abandon on Harrison street thirty-two manholes and two conduit runs, which now consist of from twelve to twenty duets each. Also we will abandon about 22,000 feet of cable. "In State street we will abandon fifteen manholes and a run of conduit be- tween Madison and Van Buren, with a cross-section of six ducts. We will abandon also in this street about 2,400 feet of cable. "We will also have fifteen crossings to reroute on Harrison, State and Ran- dolph streets. It is planned that we will require probably seven new crossings." Extraordinary Depreciation. Aside from the startling claim of the Company that its subscribers should pay to it, during the next five years, $2,090,000 for expenses on account of the proposed subways and $100,000 a year for every year's postponement of such construction, another $4,216,000 is claimed on account of extraordinary deprecia- tion. The magnitude of these claims was first brought to the writer 's attention in letters from the Company October 1st and 5th. Previous letters and conversations had referred only to an expense of about $200,000 on account of subways and to the substitution of some new switchboards and the abandonment of two or three central exchanges. The present claim of the Company, as put in final shape in the enclosed letter of October 10th, has necessitated a few days' further examination. The letter from the Company's chief engineer is given in full: 50 Prof. E. W. Bemis, City Hall, Chicago. Dear Sir: "Oct. 10, 1912. Extraordinary Depreciation. We have reviewed carefully our figures submitted in letters to you of October 1st and 5th on extraordinary depreciation and would like to make some modifica- tions which I believe will more clearly represent the true costs involved. The losses involved in the abandonment of buildings and switchboards because of inadequacy or improper location are as follows: TABLE A. Original Cost. 398,000 Net Salvage. Loss. $ 398,000 Main & Franklin C O equipment 396,000 $100,000 296,000 Central-Randolph building 159,000 100,000 59,000 Central C O equipment 388,000 98,000 290,000 Randolph C O equipment 304,000 152,000 152,000 Harrison C. O. equipment 400,000 100,000 300,000 Calumet building 42,000 42,000 Calumet C O equipment 123,000 31,000 92,000 Irving Park building 21,000 10,000 11,000 Irving Park C. O. equipment 65,000 33,000 32,000 West Pullman building 13,000 6,000 7,000 West Pullman C O. equipment 41,000 10,000 31,000 Rogers Park 50,000 25,000 25,000 Morgan Park, Washington Heights and Longwood 8,000 2,000 6,000 Total $ 2,408,000 $667,000 $1,741,000 Net loss on conduit abandoned in above . . , 85,000 Net loss on II. G. cable 90,000 Total $1,916,000 The introduction of the semi-automatic switchboard which you and I saw in New York last spring will also result in the abandonment of the "~B" boards and the reconstruction of the "A" boards in all other offices as estimated in the follow- ing statement: TABLE B. Original cost of Chicago central office switchboards not included in above statement $3,000,000 Salvage 700,000 Loss on account of semi-automatic switchboard $2,300,000 The following table will show ' in detail how we estimate the salvage of $700,000 in Table B: 51 TABLE C. Total answering jacks, all Chicago exchanges 140,000 Total answering jacks in offices of Table A 40,000 Total answering jacks in offices of Table B 100,000 Total "A." sections, all Chicago offices 407 Total " A " sections in Table A 154 Total "A" sections in offices of Table B 253 Salvage on 100,000 answering jacks at $7 $700,000 Salvage on 253 switchboard frames at $250 63,000 Gross Salvage $763,000 Cost of remodeling 253 "A" sections at $200 50,000 "Net salvage $713,000 (Say $700,000.) In addition to the above noted losses on buildings and central office equipment which the Company must face, large sums will be involved in the loss of conduit and underground cables should the City go ahead with the subway system now planned. These losses will aggregate $1,165,000 for conduit and $675,000 for underground cable, at total of $1,840,000. In addition to the above amount, which covers the direct loss of plant des- troyed, it would be necessary to do a large amount of temporary work during the construction of the subways in maintaining crossings, etc., over the obstructed streets. In a number of instances the proposed subways will practically cut our exchange districts into halves, and it will be necessary of course at all times to maintain sufficient crossings to enable us to give service to all subscribers. We estimate that this item will amount to $250,000. These two items, of direct loss on plant destroyed and the expense incident to maintaining service during actual subway construction work, together amount to $2,090,000, and this figure would represent the estimated total loss to the Telephone Company on account of the construction of passenger subways in these streets. I have summarized the extraordinary reconstruction in the above tables in the following table: TABLE D. Building and switchboards abandoned on account of inadequacy of being not well located $1,916,000 Additional central office switchboards to be abandoned on account of semi-automatic 2,300,000 Underground conduits to be abandoned on account of subway construction 1,165,000 Net loss on underground cables on account of subway construction 675,000 Cost of maintaining service in cables during construction 250,000 Total $6,306,000 All of the above estimates have been made on the basis of the present tele- phone plant. As this plant is growing rapidly, delays in the subway work or in the adoption of the semi-mechanical switchboard or for any other reason, will result in substantial increases in investment for switchboards in the offices in- volved, and for cables in the streets involved in subway construction, and cor- responding increases in the losses which must be met. I would expect these to increase at not less than $150,000 per year. Yours trulv, " j. a. WEAY, JGW:GN Chief Engineer." 52 It will be observed that this estimates an extraordinary expense during the next five years of $6,306,000. Deducting the $2,090,000 on account of subways, there remains $4,216,000 because of the proposed abandonment of certain buildings and central office equipment. This matter appeared so serious that the writer felt justified in delaying the report until he could visit all the properties which it was proposed to scrap. We will here consider them in the order in which the chief engineer of the Company believes they should be changed or scrapped. The scrapping of certain buildings with their equipment, in order to put up better buildings or change the location of the exchanges, will be first considered. We will then take up the displacement of other central office equipment to make room for the semi-mechanical or semi-automatic switchboards. A Displacement of Office Buildings and Equipments. The proposed improvements and changes will be considered below in the order which the chief engineer holds will be followed in actual reconstruction: 1. Harrison Central Office Equipment. This equipment of about 17,389 'phones will soon be transferred to the new Wabash Exchange on Federal street. The Harrison Exchange is in a rented building and some of the switchboards are fourteen years old and somewhat worn. After allowing $100,000 for salvage, the net cost of the property discarded plus the cost of moving are estimated by the Company to involve a net loss of $300,000. 2. The Central Exchange. This is a rented building with about 14,000 'phones and is to be transferred within two or three years to the adjoining building known as the Eandolph Exchange, on the south side of Washington between Clark and Dearborn. Some of these switchboards were installed as early as 1898, but some are only six or seven years old, with the latest equipment. The net cost of this removal, from Central to Randolph, is given as another $300,000. 3. The Morgan Park, Washington Heights and Longwood Exchanges. These exchanges, with only 1,152 'phones in the aggregate, occupy the second floor of rented buildings in the southwestern part of the city. They are to be con- centrated in a single exchange at a net cost of $6,000. 4. The Irving Park Exchange. This is located on Irving Park boulevard, near 42d avenue, and has 5,138 'phones. It is said ,to be located too far west for the district, whose growth is eastward. The loss in removal from this well-equipped station and good building owned by the Company is given as $31,000. The cost of the four changes above described is estimated by the Company at a total of $629,953, but they also claim a further expense during the next five years of $1,011,047, as follows: 5. The Rogers Park Exchange. This supplies 2,846 telephone stations and is located near Clark street and Lunt avenue, on the north side. The Company claims that it is too far north and that it should be abandoned, at an expense of $30,000. 6. The Calumet Exchange. This is near 22d street and Michigan boulevard and supplies about 8,048 stations. It is well equipped, but is in a rear brick building which may be too small if, as is expected, business develops more rapidly in this section than has hitherto been the case. Instead of the rear building, the Company desires to tear down the row of residences which they own in front of the building now occupied by the exchange and put up a large new building. The prospect of doing this within the next five years does not appeal to the writer as very certain. 7. The Central-Randolph and Randolph Exchanges. Still less likely of im- mediate accomplishment appears the proposition of scrapping the entire Randolph Exchange, and the Central Exchange, which is to be transferred soon to the Randolph, the idea being to put everything downtown into the Wabash and Main Exchanges, at a cost for scrapping and removal of $263,000. The building is comparatively new and is owned by the Company, and serves about 13,000 stations. 8. Main Office Building. Next in point of time is the proposed replacement of the main office building on Washington street, with its 16,653 telephones, by a much higher building that will provide room for growth, and be in other ways better fitted for the needs of the Company. The net depreciation on the present 53 building and its equipment is estimated by the Company at $694,000. The decision to make- this change within the next five years has not been reached and does not appear sufficiently probable to justify its inclusion in the present esti- mates. 9. The West Pullman Exchange. This exchange, with about 3,092 'phones, is well housed in a building owned by the Company, but a new location a mile further northwest is thought desirable. The loss in the transfer is computed at $3,300, but the Company considers that this can come later than the changes in the main building. It may be omitted from any consideration at present. If all the nine exchanges were to be removed or scrapped, the Company estimates a net loss in abandoned conduit and cable of $175,000. This added to the $1,741,000 loss on buildings and equipments means a total loss, according to the Company, of $1,916,000 from the proposed changes in the above central stations. The Company, however, has made a mistake of much importance in its computa- tions. The Company has reached its estimate of losses by a deduction of the esti- mated salvage from what it calls the original cost in each case. The figures given, however, are not the original cost, but are the higher appraised value new of Byllesby and Arnold. But a larger mistake than that was made. Byllesby and Arnold depreciate by $901,964 the buildings and office equipments which it is proposed to scrap. Since this depreciation was made up by the depreciation reserve already discussed, only the depreciated value less the salvage can now be considered. Making this correction on buildings and equipments and in the same manner about 20% on the conduits and cables, there is left only about $800,000 of net loss instead of $1,916,000 in case all these exchanges are abandoned within the next five years, as suggested. If only the first six of the exchanges named are thus abandoned, which appear to be the only ones definitely determined upon, the loss after deducting the accumulated depreciation reserve on the particular property in question would not exceed $350,000, while if Eogers Park and Calumet are undisturbed the loss will not exceed $250,000. The Company does not claim that in most cases they are under the necessity of removing these exchanges except to secure greater economies in future construction and operation. It may safely be assumed that any expense incurred beyond the $350,000 will come back to the Company and the subscriber in economies of one kind or another. In taking this position, no reflection is intended upon the sincerity or wisdom of the Company in looking forward to all these changes as desirable. Probably most of them will come in time. The only question is as to how soon. v B. Semi-Mechanical Switchboards. The A. T. & T. has been making successful use in its laboratory building in New York of a new switchboard sometimes called the semi-mechanical, sometimes the semi-automatic, which will render possible, it is claimed, not only cheaper operation, but better service. A central station is soon to be equipped in the East with a new board. If it continues to work successfully the chief engineer of the Chicago Telephone Company expects that some boards can be secured in a year and a half or two years for Chicago. This is the basis for the estimate of the Company that they will displace $3,000,000 worth of central office switchboards, at a net loss of $2,300,000, during the next five years, or practically in the last three years of the five-year period, and thus make room for the new board. The writer does not see his way to adding anything to the operating expenses of the Company on this account. The practicability of the new switchboard is as yet to be determined. So far as the new board may be introduced it is likely to reduce the operating expenses enough to cover, in a reasonable time, the depreciation charged. About 25% of the operators are at the so-called B boards, which would be no longer needed with the new switchboards. Operators' wages average $6.76 per year per station. One-fourth of this, or $1.69 would be saved, if the Company's claims for the new switchboard prove true. The saving on the 400,000 telephones which will be in use in the city by the Company by 1915 would be $676,000 a 54 year. It would, therefore, seem proper for the savings from the new board to pay for its introduction, which at this rate, it would speedily accomplish, rather than to treat the possibility of introducing this board as a factor in the fixing of rates today. The new switchboard may cost more than the old, but any increased interest thereon would leave intact much of the above saving of over $600,000 a year. Furthermore, the appraisers have written off from the present switchboards under discussion over $800,000 which is already provided for in the depreciation reserve. This will reduce the amount that would have to be raised from other funds to about $790,000. Conclusions on Extraordinary Depreciation. If subways should entail a $500,000 cost upon the Company, and if a further loss of $250,000 in comparison with the present appraised value is incurred in the abandonment or removal of many of its central exchanges, or a total of perhaps $750,000, this might mean a further burden upon the subscriber of $150,000 a year for the next five years. It is quite possible, however, that the subway cost, when it comes, could be wisely capitalized. With the growth, moreover, in revenues and the larger growth that might come from a reduction in charges, the above mentioned burden would not necessarily be followed by such a reduction in the earnings of the Company as might at first thought be expected. It is indeed, possible that these anticipated burdens will not materialize to any more serious degree than those which the Company has met in the past without any considerable increase in expenses or reduction in its depreciation reserve. Results of the Ordinance of 1907. In 1906 and 1907 large 'reductions were made in telephone rates. No attempt has been made to go back of 1900, but since January 1 of that year the chief changes have been as follows: Flat rate business 'phones were charged $175 a year in parts of the city outside of the business center, until 1906, when a court decision led to the reduc- tion of this rate to $125. At the same time, in 1906, the charge of $175 for a copper metallic circuit, or two-wire system, was reduced to $125, and the grounded one-wire circuit disappeared. The above changes meant a reduction of $50 to all flat rate users having return metallic circuit and a reduction of $50 to every flat rate business user outside of the center of the city. On December 1, 1907, the flat rate line residence 'phones were reduced from $100 to $72, while the two-party line was reduced from $75 to $56- and the four- party line at $60 was abolished. The four-party line users could secure a two- party line at $4 less than the four-party line had cost. Message rates were reduced from 1,000 messages for $95 in 1906 to $80 in 1907 for the same number of messages, and $60 thereafter. The charge for 3,000 messages, similarly fell from $162 in 1906 to $150 in 1907, and $114 in 1908, while for 5,000 messages it fell from $222 in 1906 to $210 in 1907, and $160 in 1908. Extension 'phones which had been $12 to $30 in 1905, were reduced to $6 in December, 1907. On nickel 'phones great reductions were made in 1907. Instead of guarantee- ing 10 cents a day and securing two messages on a ten-party line, a business man now, for 12% cents, can have two messages a day on a two-party line and extra messages at 5 cents each. On a two-party nickel line a business man formerly must guarantee 20 cents securing thus four messages. He is now charged the same amount on a single party nickel line. In case of residences, a person now guaranteeing a nickel a day has the use of a four-party line, while before December, 1907, he had only the use of a ten- party line for the same charge. A subscriber to a neighborhood exchange formerly paid 10 cents toll for telephoning to anybody outside of his exchange, while a person outside telephoning 55 him must also pay 10 cents; but since December 1, 1907, the charge to the neigh- borhood exchange subscriber was reduced to 5 cents and no charge was made to any other subscriber within the city limits for telephoning messages to the neighborhood exchange subscriber. The total reduction in earnings per telephone was from $49.74 in 1906 to $39.72 in 1908. This total fall of $10.02, if multiplied into the number of tele- phones in use at the close of 1908 t>f 231,180, would mean a reduction of over $2,300,000 that took place in the city and suburbs mostly in the city during those two years. This decline in revenue per telephone, together with the cost of transforming the 10-party to 4-party lines, made a considerable reduction in the ratio of net earnings to investment. The net return, before making any allowance for additions to the depreciation reserve, fell from 13.82% in 1906 to 7.10% in 1908. The dividends, however, were not affected, but during 1908 and 1909 nothing was added to the depreciation reserve. The growth of business and earnings was so great in 1910 and 1911 that over $1,000,000 a year in the city and suburbs was put into the depreciation reserve in addition to the regular 8% dividend. The earnings before deductions for depreciation reserve bore the following relation to the average investment as shown by the books during the year in question. The number of telephones at the end of each year is also given for city and suburbs: TABLE No. 20. EAKNINGS AND TELEPHONES SINCE 1904. Eatio Earnings to Investment. (Per Cent.) 1905 14.60 1906 . 13.82 Year. 1907 1908 1909 1910 1911 8.12 7.10 8.25 9.89 9.89 Number of Telephones. 143,223 170,834 202,681 231,180 262,359 300,618 335,652 Improvement in the Service. The public have a right to be, and are, as much interested in good service as in low rates. Poor service, with resulting dissatisfaction, even ^though accompanied with a saving in operating expenses, is no benefit in the long run to a company. Widely diverse opinions prevail in the city as to the success of the Company in trying to give good service. No system of regulation, however, which stops short as all regulation everywhere has done of allowing the public regulating body to appoint both the manager and a majority of the board of directors, would promise any complete solution. Such a solution might easily involve other diffi- culties as great as those removed by it, and anyway need not be considered as needed or practicable in Chicago. Something, however, could and should be done. Some means should be devised for better protection to the public against possible carelessness and give it greater confidence that its just complaints are being properly met. City Telephone Bureau. It would be to the advantage alike of the Company and of the public if the city maintained a properly equipped bureau for receiving and investigating all complaints of service. Telephone users often believe that they cannot secure proper consideration of their grievances, and so do not attempt to present them, but disseminate somewhat widely among their friends their opinion of the company. 56 If such a bureau were open for all complaints and took them up promptly with the Company, the latter would soon be spurred on by public opinion to approve any conditions that could easily be improved. If this could be done, the bureau's reports to the Council would doubtless be followed by efficient action. Provided, as the evidence seems to show, that the Company really desires to give good service, such a bureau would be a great help also to the Telephone Company. The latter would, in some cases, learn, and ttus more speedily improve, the weak points in the system, and in other cases it would doubtless convince the bureau, and through the latter the public, that some of the complaints were not well founded. There is ample precedent for such a course by the city in the offices which are now being maintained for the inspection of gas and electricity and traction service. If desired, the scope of the bureau could include the systematic gathering of information so that couucilmanic action may be easier when it next becomes necessary, five years hence, to fix the rates. Such investigations are constantly being made for the Massachusetts Highway Commission, which controls the New England Telephone and Telegraph Company. The present telephone ordinance (Sec. 2) lodges some of the work here pro- posed with the City Comptroller, but it does not go far enough. It gives him the right to examine the accounts and records of the Company, but does not appear to create any complaint department or intermediary between the public and Com- pany, such as is now proposed. Whether the power of the Comptroller should be increased to cover the whole subject, or whether the work should be given to the City Electrician, to the Secretary of the Gas, Oil and Electric Light Committee, or some one else, is a question both of law and policy upon which no opinion is now expressed. Measured Service for Residences. While the present report does not take up specified changes in rates, but only the question of whether the rates as a whole can be changed and how much, it is nevertheless important, and in accordance with the desire of the Committee, that a reference be made to three other subjects, nickel 'phones, subscribers' meters and the character of the service. The nickel coin box is popular and needed in drug stores and many other public places. In many residences it is also desired. This is especially true where there is danger of abuse by neighbors imposing on the good nature of the tele- phone subscriber, or where it is desired to pay 5 cents per call rather than to pay for a month 's use at one time: On the other hand, some are much opposed to the nickel 'phones, and a con- siderable portion of the subscribers to the 2-party and 4-party nickel 'phones in residences apparently would be better pleased to pay for their calls by the month without any use of nickels or slugs. Such a service is offered in some other large cities in the form of a measured residence service for either 1-party, 2-party or 4-party lines. It is believed that a rate can be adopted sufficiently attractive to enable those who are dissatisfied with the nickel 'phones to take the new service. A certain payment per month would be guaranteed, and all calls in excess of what that amount calls for at, say, 5 cents, would be paid for at the end of the month as in the case of the nickel 'phones; or, a readiness to serve charge per month could be made, and a lower calling rate than 5 cents could be adopted. Meters. The Company has already equipped a large portion of its present measured service lines, which are chiefly on business places, with meters at the central offices, known as Central Office Message Registers, and expects to finish the entire installation within four months. A meter for the use of subscribers, whether busi- ness or residence, who have a single-party measured line, has been developed by the A. T. & T. and sufficiently tested on about 200 business premises in Chicago to show that it is practicable. When the Maryland Public Service, Commission issued an order, some months 57 ago, for abolishing all flat rate business lines an order whose execution has been postponed pending further investigation it was provided that any parties who desired one of these meters could have it on payment of 25 cents a month, or $3 a year. The Commission investigated the meters on the market and considered the one offered by the A. T. & T. to be the best and most reliable. The cost of $3 a year was considered by the Commission to be only a fair payment for the investment and for the care and depreciation of the same. Not one per cent, of those who were expecting to come immediately under the metered service ever applied for a meter. Very few using the meters in this city think there is sufficient evidence of mistakes in the bills of the Company to warrant their bothering to have the de- vice, even if free. Very few, indeed, express any belief that it is useful enough to warrant their paying even the small rental for it. Under these circumstances it would seem a mistake to burden the rates of all the subscribers with a device which few appear to want, yet it would be well to provide that any one might have this meter if he desires to pay $3 per year for it. There appears to be no meter on the market to-day for 2-party and 4-party measured lines. Where such service is given, as in Boston and Baltimore, a record is kept on paper slips by the operators, as has been the case until recently, and still is to some extent with measured business lines here. A recording device that will show to the subscriber the number of coins or slugs that have gone into the coin box would be popular with the subscriber and would also be a check for the telephone company upon its collectors. But there seems to be no such device at present in use by any telephone company, whether Bell or independent. If the suggestion for measured service is adopted for resi- dences there would be less need for such registers, since many of those who are dissatisfied with this and other features of the coin box would doubtless change to measured service. Conclusions. In the light of all the above, the reduction of $700,000 in the charges of the Chicago Telephone Company within the city limits appears reasonable. Such a reduction can be met by the Company in several ways. 1. Instead of putting about $975,000 into the depreciable reserve, as in the city exchange in 1911, $500,000 may be set aside for that purpose until re- pairs and the cost of station removals, now amounting to about 7.5% of the plant investment, shall decline further, as they are likely to do. Even the $500,000 left in the reserve on this supposition, together with the actual repairs and remov- als of 1911, would bring the total maintenance and depreciation expense only to 9%. This item, like the Chicago expense for station removals, is higher than the average for the Bell companies, either as a whole or in the larger cities. Tf $475,000 of the proposed reduction of $700,000 be taken from the depre- ciation reserve, the remaining $225,000 may be secured by a reduction of the divi- dend on the company as a whole from 8% to 7.1%, or on the city portion thereof to 6% c/ r . Since the American Telephone and Telegraph Company, which owns nearly all of the stock, collects in rentals within the city about $200,000 more than the service appears to cost, or about 1% on the stock, a reduction in the dividend rate to 6%>% or 7% seems not unreasonable. 2. For maintenance and depreciation 9V->% might be allowed. On this basis the reduction in last year's additions to the reserve would be about $350,000. The remaining reduction of $350,000 could be secured by a reduction of the divi- dend on the city part of the stock to 6^%. Since the A. T. & T. would, on this hypothesis, continue to receive the excess rental, that would virtually mean a three-fourths per cent, further dividend. 3. Another solution, in lieu of part of the reduction of dividends, suggested above, would be the reduction of the rental. This is about 1%% on all the prop- erty and about 2 1 /4% on the stock, or about $1.75 per 'phone. Of the $445,550.72 paid in 1911 and of the $475,000 or more that will be paid in 1912, $200,000 could apparently be deducted by the local company and still leave the A. T. & T. a reasonable return. 4. Still another treatment of the matter would be a smaller reduction in 58 the dividend and the utilization of the 1% profit obtaining by loaning to the Central Union at 6% the proceeds of over $10,000,000 of the $14,000,000 of 5% bonds lately sold by the Chicago Telephone Company. As this money is grad- ually withdrawn from the Central Union to meet the construction needs of the Chicago Company, the maintenance of a 1% or 8% dividend rate will represent a smaller percentage of the total investment than now. Taking the city and suburban divisions together, the case stands thus: TABLE NO. 21. DECLINING EATE OF RETUEN. Per Cent, of Eeturn on Total Amount. Eeturn. Securities. 1911. 1916. 1911. 1916. 1911. 1916. Dividends at 8%. Stock $27,000,000 $27,000,000 $2,160,000 $2,160,000 Interest at 5%. Bonds and notes 6,000,000 20,000,000 300,000 1,000,000 Total $33,000,000 $47,000,000 $2,460,000 3,160,000 7.45 6.72 Without any reduction in the rate of return on the stock and bonds the larger proportion of bonds now assured will reduce the average rate of return on all these securities from 7.45% to 6.72%. It may be remarked that all of the new 5% bond issue of $14,000,000 has netted the Company about par or a trifle above. 4. Outside of the expense that may be entailed by subway construction in 1915-17, or the last three years of the coming five-year period, there seems little in the claim for a special allowance for extraordinary depreciation. It is assumed that little, if any, expense will be incurred on account of subway construction in 1913, and that the expense to the Chicago -Telephone Company will not exceed $125,000 a year thereafter, or that the excess should be capitalized. When the rates are again adjusted, five years hence, this matter can be more intelligently treated. It is believed that a reduction of $700,000 in telephone rates will stimulate the growth of the company, and leave enough in the maintenance and in the de- preciation reserve to meet the needs of the next five years, and omit such extraordi- nary needs as are likely to develop from the change of central stations, displace- ment of switchboards or subway construction. It will also leave a fair return to the owners of the property. If, however, the new ordinance should provide, as it well may, for a measured service to take the place of the nickel service for those who desire to make the change, the cost to the company of this change, divided over the five-year period, should be deducted from the above $700,000 a year. Moreover, the ability of the company to stand this reduction in revenue will be affected by how it is done. The importance of a wise readjustment of the rates among over twenty classes of service can hardly be exaggerated. If the Company were not confronted with the expenses and loss of business that to some small extent may attend the competition of the rival company the Illinois Tunnel Company with its automatic telephones, a lower rate of return on capital might be demanded. If this competition, however, should become at all serious, the Chicago Telephone Company might be expected to reduce rates vol- untarily as much as is here advised. While operating expenses per telephone are increasing, the investment per telephone is decreasing and the business is rapidly growing. The number of tele- phones in the city, aside from the 25,000 or more of the rival company, grew from 268,383 on December 31, 1911, to 298,380 on October 28, 1912, an increase in the ten months of about 30,000, as compared with an increase of only 29,300 in the previous twelve months. This situation, joined to the ability of the Company to finance its extensions for three or four years out of the $14,000,000 of 5% bonds just floated may permit the Company to make the suggested reduction in rates without any cut whatever in its 8% dividend or in its rental to the A. T. & T. 59 In no investigation hitherto conducted by the writer has a company pursued as open a policy with respect to its books and methods as has the Chicago Tele- phone Company, and in turn the writer has endeavored to give due weight to all considerations affecting both the welfare of the Company and the just demands of the public. EDWAED W. BEMIS. APPENDIX 1. CONDENSED BALANCE SHEETS, 1881 TO 1911, INCLUSIVE.* Assets. 1881 1882 1883 Invested in plant $490,928.99 $561,038.19 $621,606.72 Invested in real estate 2,537.00 2,537.00 2,000.00 Other investments Material on hand 8,657.38 5,068.42 6,309.60 Furniture, fixtures, tools and teams Bonds (sundry) 30,000.00 50,000.00 Bills and accounts receivable 99,432.13 21,614.52 37,224.16 Balance of bills and accounts Payable and receivable Cash 50,089.92 39,006.16 34,332.09 Total assets $651,645.42 $659,264.29 $751,472.57 Liabilities. 1881 1882 1883 Capital stock $500,000.00 $500,000.00 $600,000.00 Bonded debt Eeserve for deferred maintenance Reserve for taxes Reserve for insurance fund Reserve for depreciation on buildings. . Bills and accounts payable 46,284.32 25,883.71 21,931.05 Balance of bills and accounts payable and receiA~able " Miscellaneous reserves 34,000.00 50,000.00 58,500.00 Surplus 71,361.10 83,380.58 71,041.52 Total liabilities $651,645.42 $659,264.29 $751,472.57 *Mr. Hagenah's Report, pages 7-10, for 1881-1900, and Hall's Report, Exhibit M., for 1901-11. Assets. 1884 1885 1886 Invested in plant $653,743.16 $732,388.05 $805,318.72 Invested in real estate 1,000.00 500.00 Other investments Material on hand 7,773.25 11,470.71 10,770.33 Furniture, fixtures, tools and teams Bonds (sundry) 50,000.00 50,000.00 50,000.00 Bills and accounts receivable 34,050.18 115,022.74 117,445.54 Balance of bills and accounts payable and receivable Cash 45,236.55 54,899.32 62,903.30 Total assets $791,803.14 $964,280.82 $1,046,437.89 60 APPENDIX 1 Continued. Liabilities. 1884 1885 1886 Capital stock $693,000.00 $762,300.00 $838,600.00 Bonded debt Reserve for deferred maintenance Reserve for taxes Reserve for insurance fund Reserve for depreciation on buildings. . . . Bills and accounts payable 27,131.53 127,440.71 118,656.15 Balance of bills and accounts payable and receivable Miscellaneous reserves 65,500.00 74,500.00 82,500.00 Surplus 6,171.61 40.11 6,681.74 Total liabilities $791,803.14 $964,280.82 $1,046,437.89 Assets. 1887 1888 1889 Invested in plant $884,313.15 $1,131,342.03 $1,302,625.49 Invested in real estate 92,722.32 Other investments Material on hand 8,970.38 13,016.38 15,956.13 Furniture, fixtures, tools and teams Bonds (sundry) 25,000.00 Bills and accounts receivable 175,998.12 171,107.75 220,938.23 Balance of bills and accounts payable and receivable Cash 49,064.31 20,719.26 35,200.56 Total assets $1,236,068.28 $1,336,185.42 $1,574,720.41 Liabilities. 1887 1888* 1889 Capital stock $964,400.00 $1,089,800.00 $1,253,300.00 Bonded debt Reserve for deferred maintenance Reserve for taxes Reserve for insurance fund Reserve for depreciation on buildings. . . . Bills and accounts payable 175,908.01 144,339.29 145,091.04 Balance of bills and accounts payable and receivable Miscellaneous reserves 92,500.00 94,000.00 109,000.00 Surplus 3,260.27 8,046.13 67,329.37 Total liabilities $1,236,068.28 $1,336,185.42 $1,574,720.41 Assets: 1890 1891 1892 Invested in plant $1,734,212.73 $2,160,392.41 $3,082,262.20 Invested in real estate 150,127.25 332,761.17 Other investments Material on hand 34,098.51 52,606.81 74,760.30 Furniture, fixtures, tools and teams Bonds (sundry) Bills and accounts receivable 596,698.49 99,784.02 142,191.17 Balance of bills and accounts payable and receivable Cash 30,159.66 58,473.54 193,482.89 Total assets $2,395,169.39 $2,521,384.03 $3,825,457.73 61 APPENDIX 1 Continued. Liabilities. 1890 1891 1892 Capital stock $1,754, 700.00 $2,000,000.00 $3,280,200.00 Bonded debt Reserve for deferred maintenance Reserve for taxes 35,308.02 16,628.67 Reserve for insurance fund Reserve for depreciation on buildings. . . . Bills and accounts payable 397,056.85 242,493.13 260,228.66 Balance of bills and accounts payable and receivable Miscellaneous reserves 125,700.00 133,462.97 158,306.07 Surplus 117,712.54 110,119.91 110,094.33 Total liabilities $2,395,169.39 $2,521,384.03 $3,825,457.73 Assets. 1893 1894 1895 Invested in plant $3,668,190.38 $3,821,356.76 $4,169,686.09 Invested in real estate 332,849.17 338,632.62 351,753.20 Material on hand 118,078.67 59,800.00 54,234.84 Bills and accounts receivable 156,772.67 151,399.39 165,309.74 Cash 90,806.38 139,906.08 83,417.31 Total assets " $4,366,697.27 $4,511,094.85 $4,824,401.18 Liabilities. 1893 1894 1895 Capital stock $3,796,200.00 $3,796,200.00 $3,796,200.00 Reserve for deferred maintenance 120,000.00 200,889.40 Reserve for taxes 57,358.06 43,702.36 77,065.26 Bills and accounts payable 197,122.39 220,375.64 329,656.24 Miscellaneous reserves 187,092.77 189,960.81 156,364.61 Surplus 128,924.05 140,856.04 264,225.67 Total liabilities $4,366,697.27 $4,511,094.85 $4,824,401.18 Assets. 1896 1897 1898 Invested in plant $4,255,047.92 $4,192,868.40 $4,814,774.55 Invested in real estate 352,861.42 352,861.42 359,973.92 Material on hand 78,199.00 70,407.99 102,726.45 Bills and accounts receivable 93,223.87 87,882.07 229,566.53 Cash 315,647.18 453,454.69 181,902.02 Total assets $5,094,979.39 $5,157,474.57 $5,688,943.47 Liabilities. 1896 1897 1898 Capital stock $4,336,500.00 $4,336,500.00 $4,336,500.00 Reserve for deferred maintenance 200,889.40 10,0,000.00 474,782.22 Reserve for taxes 81,428.31 90,747.85 60,536.97 Bills and accounts payable 143,311.56 188,165.58 257,549.72 Miscellaneous reserves 17,643.47 22,541.02 26,482.16 Surplus 315,206.65 419,520.12 533,092.40 Total liabilities $5,094,979.39 $5,157,474.57 $5,688,943.47 Assets. 1899 1900 Invested in plant $5,993,364.55 $7,190,012.19 Invested in real estate 622,558.09 932,040.42 Material on hand 178,401.94 221,338.67 Bonds (sundry) 15,000.00 Bills and accounts receivable 202,762.1 1 Cash .' 73,597.13 10,039.35 Total assets $7,070,683.82 $8,368,430.63 62 APPENDIX 1 Continued. Liabilities. 1899 Capital stock $5,000,000.00 Reserve for deferred maintenance 903,934.14 Eeserve for taxes 99,569.71 Bills and accounts payable 387,686.24 Balance of bills and accounts payable and receivable. Miscellaneous reserves 29,391.35 Surplus 650,102.38 Total liabilities $7,070,683.82 Assets. 1901 1902 Investment in real estate, plant, etc. Real estate $ 1,045,658.77 $ 1,111,644.96 Plant, equipment, etc 8,882,483.67 10,543,174.81 Construction in process 5,338.03 679,034.43 Total investment in real estate, plant, etc 9,933,480.47 12,333,854.20 Current and working assets Supplies $ 355,215.77 $ 312,242.90 Total working assets 355,215.77 312,242.90 Cash and deposits 353,703.80 434,541.52 Bills receivable 3,410.06 3,396.93 Accounts receivable 329,141.12 549,431.16 Prepaid expenses . 11,893.29 15,006.62 Total current assets 698,148.27 1,002,376.23 1900 $7,000,000.00 463,578.49 73,222.74 637,500.62 17,897.14 176,231.64 $8,368,430.63 1903 ? 1,273,735.59 12,635,532.79 13,909,268.38 $ 366,103.78 366,103.78 547,640.00 1,569.31 719,758.30 26,223.40 1,295,191.01 Total current and working assets... Stocks and bonds . 1,053,364.04 $ 1,314.619.13 $ 1,661,294.79 15,000.00 14,500.00 Total $11,001,844.51 $13,662,973.33 Liabilities. 1901 1902 Capital liabilities Capital stock $ 9,315,900.00 $1 1,993,400.00 Loans by banks 100,000.00 125,036.75 $15,695,599.92 1903 $14,000,000.00 Total capital liabilities $ 9,415,900.00 $11.993,400.00 $14,000,000.00 Current liabilities Accounts payable $ 837,436.01 $ 371,381.91 3 ; 277,497.06 Accrued liabilities not due 140,611.28 183,419.61 238,972.29 Unearned revenue 5 484.71 36 591 38 46,336.56 Total current liabilities $ 983 532 00 $ 591 392 90 if ; 562 805 91 Depreciation and other reserves Depreciation of plant $ 296 432 87 $ 346 551 32 $ 1 646 551 32 Other reserves 5 875 74 304 246 44 21 475 49 Total depreciation and other reserves. $ 302,308.61 $ 650,797.76 $ 668,026.81 Surplus $ 300,103.90 $ 427,382.67, $ 464,767.20 Total $11,001,844.51 $13,662,973.33 $15,695,599.92 63 APPENDIX 1 Continued. Assets. 1904 1905 1906 Investment in real estate, plant, etc. Eeal estate $ 1,346,560.20 $ 1,509,895.25 $ 1,764,281.40 Plant, equipment, etc 13,208,689.17 14,317,138.17 16,706,425.90 Construction in process 88.87 *336.28 Total investment in real estate, plant, etc $14,555,249.37 $15,827,122.29 $18,470,371.02 Current and working assets Tools and vehicles 27,799.50 83,885.85 169,056.85 Supplies 173,156.42 125,424.67 411,445.63 Total working assets $ 211,093.21 $ 229,056.08 $ 625,461.18 Cash and deposits 511,312.69 251,321.36 19,084.94 Bills receivable 501,709.09 852,581.59 12,547.21 Accounts receivable 762,384.77 489,946.91 674,646.28 Prepaid expenses 13,124.91 3,667.33 1,833.33 Total current assets $ 1,788,530.86 $ 1,597,517.19 $ 708,111.76 Total current and working assets $ 1,999,624.07 $ 1,826,573.27 $ 1,333,572.94 Stocks and bonds $ 114,650.07 $ 104,263.39 $ 93,876.74 Total f $16,669,523.51 $17,757,958.95 $19,897,820.70 Liabilities 1904 1905 1906 Capital liabilities Capital stock $14,000,000.00 $14,000,000.00 $14,000,00.00 Loans by banks 250,000.00 Total capital liabilities $14,000,000.00 $14,000,000.00 $14,250,000.00 Current liabilities Bills payable (Western Electric Company) $ 500,000.00 Accounts payable $ 187,361.85 $ 272,577.11 1,188,901.94 Accrued liabilities not due 311,120.30 275,641.34 370,708.04 Unearned revenue 39,891.13 38,122.08 34,242.31 Total current liabilities $ 538,373.28 $ 586,340.53 $2,093,852.29 Depreciation and other reserves Depreciation of plant $ 913,825.83 $ 1,295,155.61 $ 1,692,066.24 Insurance fund 150,000.00 175,000.00 Other reserves 588,941.12 871,268.52 613,563.50 Total depreciation and other reserves. $ 1,502,766.95 $ 2,316,424.13 $ 2,480,629.74 Surplus $ 628,383.28 $ 855,194.29 $ 1,073,338.67 Total $16,669,523.51 $17,757,958.95 $19,897,820.70 *Decrease. APPENDIX 1 Continued. Assets. 1907 1908 1909 Investment in real' estate, plant, etc. Eeal estate $ 2,320,934.5?, $ 2,551,487.92 $ 2,749,985.66 Plant, equipment, etc 24,151,045.70 25,206,641.39 26,787,282.71 Construction in process 173,066.33 909,225.82 1,053,058.65 Total investment in real estate, plant, etc $26,644,146.56 $28,667,355.13 $30,590,327.02 Current and working assets Office furniture and fixtures $ 104,776.34 $ 145,692.99 $ 167,158.95 Tools and vehicles 263,296.53 288,570.48 261,530.67 Supplies 399,997.23 458,221.16 521,111.2.-) Total working assets 768,070.10 892,484.63 949,800.87 Cash and- deposits 157,837.03 455,364.17 3,758,692.10 Bills receivable 12,356.20 12,429.61 828.79 Accounts receivable 864,668.69 771,079.24 727,823.80 Prepaid expenses 30,745.79 5,951.23 57,110.22 Total current assets 1,065,607.71 1,244,824.25 4,544,454.91 Total current and working assets $ 1,833,677.81 $ 2,137,308.88 $ 5,494,255.78 Stocks and bonds $ 92,819.93 $ 82,933.27 $ 72.588.00 Total $28,570-,644.30 $30,887,597.28 $36,157,170.80 Liabilities. 1907 1908 1900 Capital liabilities Capital stock $17,564,811.78 $27,000,000.00 $27,000,000.00 First mortgage 5% bonds 5,000,000.00 Loans by banks 1,385,000.00 Total capital liabilities $18,949,811.78 $27,000,000.00 $32,000,000.00 Current liabilities- Bills payable (Western Electric Company) $ 300,000.00 Accounts payable 1,371,687.26 $ 397,580.48 $ 430,066 31 Accrued liabilities not due 290,093.33 295,679.92 618,226.99 Total current liabilities $ 1,961,780.59 $ 693,260.40 $ 1,048,293.30 Depreciation and other reserves Depreciation of plant $ 1,899,613.46 $ 1,901,739.25 $ 1,901,739.25 Insurance fund 200,000.00 211,809.10 278,298.22 Other reserves 449,495.78 396,110.50 183,454.44 Total depreciation and other reserves. $ 2,549,109.24 $ 2,509,65885 $ 2,363,491.91 Surplus $ 5,109,942.69 $ 684,678.03 $ 745;385.59 Total $28,570,644.30 $30,887,597.28 $36,157,170.80 65 APPENDIX 1 Continued. Assets. 1910 1911 Investment in real estate, plant, etc. Eeal estate : $ 2,868,606.51 $ 3,204,445.31 Plant, equipment, etc 29,229,242.13 33,850,656.82 Construction in process 1,261,689.21 1,258,076.27 Total investment in real estate, plant, etc $:!3,359,537.85 $37,713,178.40 Current and working assets Office furniture and fixtures $ 126,869.53 $ 178,635.70 Tools and vehicles 284,467.69 304,100.40 Supplies 703,414.63 831,629.65 Total working assets 1,114,751.85 1,314,365.75 Cash and deposits 1,820,503.51 874,947.62 Bills receivable , 289,757.84 636.14 Accounts receivable 592,857.04 686,973.76 Prepaid expenses 68,379.31 127,509.90 Total current assets 2,771,497.70 1,690,067.42 Total current and working assets $ 3,886,249.55 $ 3,004,433.17 Stocks and bonds $ 642,966.24 $ 10,393.90 Total $37,888,753.64 $40,728,005.47 Liabilities 1910 1911 Capital liabilities Capital stock $27,000,000.00 $27,000,000.00 First mortgage 5% bonds 5,000,000.00 5,000,000.00 Loans by banks 1,000,000.00 Total capital liabilities $:;2,000,000.00 $33,000,000.00 Current liabilities Accounts payable $ 950,872.61 $ 1,214,855.25 Accrued liabilities not due 585,795.18 671,430.09 Unearned revenue 1,950.91 Total current liabilities $ 1,538,618.70 $ 1,886,285.34 Depreciation and other reserves Depreciation of plant $ 3,695,160.95 $ 4,971,823.19 Insurance fund 291,400.65 307,548.21 Other reserves 268,500.41 364,735.49 Total depreciation and other reserves $ 4,255,062.01 $ 5,644,106.89 Surplus $ 95,072.93 $ 197,613.24 Total $37,888,753.64 $40,728,005.47 66 APPENDIX 2. CHICAGO & SUBURBAN APPRAISAL VALUES AS OF AUGUST 1, 1911. APPRAISAL BY THE BYLLESBY AND ARNOLD COMPANIES. August 28, 1912. Repro- Present Present Book duetion Value Value Account Value Value (a) (b) (10 Buildings $2,570,280.15 $2,962,903.27 $2,526,717.00 $2,714,719.91 103 (20 Land 601,801.14 1,331,642.60 1,331,642.60 1,331,642.60 (17 Central Office Oper- ating Equipment 5,192,417.01 5,588,700.62 3,853,700.50 4,318,912.77 105-07(27 Exchange Furniture and Fixtures 87,897.14 97,963.47 78,062.90 78,062.90 (37 School Equipment.. 13,203.18 21,306.93 13,238.56 13,238.56 Total 105-07 $5,293,517.33 $5,707,971.02 $3,945,001.96 $4,410,214.23 (18 Station Apparatus. $2,644,586.81 $1,890,208.52 $1,959,554.62 (28 Installation 2,784,445.03 2,640,594.82 2,371,106.82 (38 Drop Wires 927,433.64 683,605.23 727,518.33 105-08(48 Interior Block Wires 19,388.51 14,139.52 15,212.50 (58 Private Branch Ex- change 1,240,991.34 970,689.48 1,040,037.55 (68 Booths and Special cial Fittings 73,378.76 48,819.18 55,034.06 Total 105-08 $7,252,801.53 $7,690,224.09 $6,248,056.75 $6,168,463.88 (01 Exchange Pole Lines $2,988,561.50 $3,963,423.00 *$2,270,076.00 *$2,541,981.00 (02 Exchange Aerial Cable 1,571,150.43 1,840,029.00 1,325,487.00 1,587,544.00 (03 Exchange Aerial Wire 2,280,366.76 1,186,770.00 948,861.00 980,181.00 (04(14 Underground Conduit Main. ( Total 3,984,762.14 5,866,070.00 4,516,703.00 5,406,696.00 ( (24 Underground 107 ( Conduit Subsid- iary (05(15 Underground Cable Main . ( Total 5,554,569.62 6,944,364.00 5,565,063.00 6,406,707.00 ( (25 Underground Cable Subsid- iary ( (35 House Cables. . 53,874.00 215,036.00 157,726.00 185,738.00 (06 Exchange Sub- marine Cable 993.43 (09 Exchange Right of Way 30,329.50 118,987.00 106,084.00 118,327.00 Total 107.. $16,464,608.37 20,134,679.00 14,890,000.00 17,227,174.00 67 Eepro- Present Present Book duction Value Value Account Value Value (a) (b) (01 Toll Pole Lines.. $ 548,701.70 $ 787,369.00 *$ 465,939.00 *$ 509,186.00 (02 Toll Aerial Cable 34,504.44 57,371.00 44,088.00 50,528.00 (03 Toll Aerial Wire 578,798.33 1,041,391.00 828,677.00 884,602.00 109 (04 Toll Underground Conduit 393,748.16 399,486.00 321,210.00 371,110.00 (05 Toll Underground Cable 410,221.46 585,513.00 480,443.00 542,316.00 (06 Toll Submarine Cable (09 Toll Eight of Way 27.44 Total 109 $1,966,001.53 $2,871,130.00 $2,140,357.00 $2,357,742.00 110 Construction in Process $1,513,525.00 $1,589,201.00 $1,589,201.00 $1,589,201.00 111 Office Furniture & Fixtures 157,600.76 266,107,79 214,027.06 214,027.06 (01 Tools 105,814.82 154,660.14 92,796.15 92,796.15 112 (02 Teams 132,142.63 159,349.45 118,943.50 118,943.50 (03 Motor Vehicles.. 42,551.47 58,638.82 44,077.05 44,077.05 Total $ 280,508.92$ 372,648.41 $ 255,816.70 $ 255,816.70 113 Total Supplies... 751,477.42 921,596.00 882,871.15 882,871.15 TOTAL $36,485,841.0643,848,103.18 34,023,691.22 37,151,872.53 120 Working Capital 847,877.85 1,050,000.00 1,050,000.00 1,050,000.00 GEAND TOTAL. $37,333,719.00 44,898,103.18 35,073,691.00 38,201,873.00 NOTE: *Present value sub-divisions of the 107 and 109 accounts are based on appraisal figures but we have pro-rated the overhead costs against the various classes of plant. 68 APPENDIX 3. CHICAGO EXCHANGE APPRAISAL VALUES AS OF AUGUST 1, 1911 APPRAISAL BY THE BYLLESBY AND ARNOLD COMPANY August 28, 1912 Account Book Value Repro- duction Value Present Value (a) Present Value (b) 103- (10 Buildings $2.328,433.31 $2,642,405.59 $2,253,975.80 $2,418,266.91 (20 Land 326,956.61 1,173,936.98 1,173,936.98 1,173,936.98 (17 105-07(27 (37 (18 (28 (38 105-08(48 (58 (68 Central Office Operating Equip- ment 4,564,693.90 4,857,496.48 3,357,489.16 Exchange Furniture and Fixtures . 73,997.58 81,869.41 64,769.68 School Equipment 13,203.18 21,306.93 13,238.56 3,758,548.30 64,769.68 13,238.56 Total 105-07 $4,651,894.66 4,960,672.82 3,435,497.40 3,836,556.54 Station Apparatus Installation Drop Wires Interior Block Wires Private Branch Exchanges . Booths and Special Fittings 2,180,563.31 2,296,822.34 673,885.74 17,385.95 1,180,171.05 60,322.27 1,593,092.64 2,178,225.90 495,203.94 12,756.98 923,423.28 40,214.85 1,647,973.41 1,962,953.13 527,704.48 13,602.43 988,258.92 45,241.70 Total 105-08 $6,115,389.57 6,409,150.66 5,242,917.59 5,185,734.07 (01 Exchange Poles (02 Exchange Aerial Cable (03 Exchange Aerial Wire ( (14 Underground Conduit, Main ) (04( Total : ) 107 ( (24 Underground Conduit, Sub-) ( ( sidiary ) ( (15 Underground Cable Main ) ( ( Total ) (05(25 Underground Cable Subsidi-) ( ( ary ) ( (35 House Cables (06 Exchange Submarine Cable . . . (09 Exchange Right of Way $1,146,320.74 1,600,289.00 * 983,638.00 *1,108,722.00 1,116,775.78 1,263,470.00 889,936.00 1,081,989.00 1,673,757.58 374,359.00 303,544.00 316,239.00 3,532,936.35 5,062,428.00 3,875,283.00 4,672,668.00 4,848,264.39 6,168,669.00 4,927,359.00 5,687,207.00 52,685.31 993.43 17,626.77 211,744.00 155,018.00 182,799.00 65,424.00 58,219.00 65,099.00 Total 107 $12,389,360.35 14,746,383.00 11,192,997.00 13,114,723.00 69 APPENDIX 3 Continued CHICAGO EXCHANGE (Cont'd) Account Book Value Repro- duction Value Present Value (a) Present Value (b) 109 110 111 112 113 120 (01 (02 (03 (04 (05 (01 (02 (03 Toll Pole lines . $ 1,663.07 $ 97,381.00 17,254.00 159,409.00 253,503.00 406,822.00 *$ 60,031.00 12,239.00 129,369.00 197,376.00 328,952.00 *$ 67,564.00 14,727.00 132,987.00 233,973.00 375,202.00 Toll Aerial Cable. . . 22,651.28 Toll Aerial Wire. 32,122.84 Toll Underground Conduit . Toll Underground Cable . . . 321,124.44 . . . 383,989.60 Total 109 . . . $761,551.23 934,369.00 $1,392,861.00 245,150.59 104,810.19 125,773.61 42,842.41 727,967.00 $1,392.861.00 196,983.03 62,886.12 92,957.87 30,631.79 824,453.00 $1,392,861.00 196,983.03 62,886.12 92,957.87 30,631.79 Construction Process ...$1,326,534.32 Office Furniture and Fixtures . . . . . 126,479.17 Tools . . 72,492.69 Teams . 105,066.16 Motor Vehicles 28,896.35 Total 112 ...$ 206,455.20 273,426.21 660,287.65 33,438,643.50 887,250.00 186,475.78 621,562.80 26,425,174.38 887,250.00 186,475.78 621,562.80 28,951,553.21 887,250.00 Total Supplies ...$ 513,721.00 Grand Total ...$ 580,494.73 Working Capital. . . . 683,224.58 $29,263,719.00 34,325,894.00 27,310,425.00 29,838,803.00 NOTE: *Present value subdivisions of the 107 and 109 accounts are based on appraisal figures but we have pro-rated the overhead costs against the various classes of plant. 70 APPENDIX 4. COST OF THE PEOPERTY NEW. Chicago and Suburban. The following table is the cost as of December 31st, as shown by the books, for each year since 1890: Depreciable Year. Property.* 1891 $ 2,144,570.28 1892 3,015,987.28 1893 3,629,678.99 1894 3,830,964.42 1895 4,189,900.08 1896 4,537,146.16 1897 4,870,554.46 1898 5,484,892.92 1899 6,857,940.65 1900 8,446,058.27 1901 10,675,635.65 1902 13,287,222.57 1903 15,337,752.64 1904 16,480,349.91 1905 18,128,924.28 1906 21,442,125.73 1907 25,656,956.43 1908 26,929,904.49 1909 28,578,619.03 1910 31,130,347.86 1911 35,425,456.16 *Hall, Schedule 2. fHall, Schedule 3. JHere it is not actual cost as shown by the books, but what Mr. reasonable as per Schedule 3. All Physical Property.f Working Capital.t Total $ 2,184,990.28 $ 100,000 $ 2,284,990.28 3,239,041.20 150,000 3,389,041.20 3,852,820.91 175,000 4,027,820.91 4,058,606.34 175,000 4,233,606.34 4,417,542.00 200,000 4,617,542.00 4,764,788.08 225,000 4,989,788.08 5,098,196.38 250,000 5,348,196.38 5,719,647.34 300,000 6,019,647.34 7,153,580.07 350,000 7,503,580.07 8,790,688.27 400,000 9,190,688.27 11,051,328.15 500,000 11,551,328.15 13,667,353.42 650,000 14,317.353.42 15,723,177.09 700,000 16,423,177.09 16,907,094.87 750,000 17,657,094.87 18,644,573.54 850,000 19,494,573.54 22,097,577.82 1,000,000 23,097,577.82 26,654,433.57 1,200,000 27,854,433.57 28,737,322.99 1,300,000 30,037,322.99 30,634,737.09 1,400,000 32,034,737.09 33,371,331.79 1,550,000 34,921,331.79 37,717,844.09 1,750,000 39,467,844.09 Hall considers 71 APPENDIX 5. GROWTH OF CHICAGO TELEPHONE COMPANY'S PLANT/ w I m X 4> 4) C -2 & a 2 3 ^ B SS C C 4) 3 <0 TJ'O "O+j "O C 5 C 2 o o o C5 C5 ^2 O CO -t< C5 O O t- CO CO O CO "3 CO(Mi-l*i<T-II> O-*r~O O iH O5 CM O _ W i-H t~ O i 1 ** C5 CO" (M i-l O 00 00 C5 O oo" H tOCOOO5COt-OOCD 1- IM u> o 10 oo o O5 41 05 co z> co i i oo o O CO >O O5 O5 06 co' co ' CO rt CO 00 rH Tjt W rH ; t- ^ 00 ' tfi 1O ' CO Tf O5 OO *O co" , f* ^f^~ . "0*^ . 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Austin Office $ 32,962.92 $ 26,004.71 $ 6,958.21 26.8 Calumet Office , 49,247.56 24,412.15 23,835.41 93.8 Canal Office 27,313.29 19,884.71 7,428.58 37.4 Central Office 159,214.01 136,136.78 23,077.23 17.0 Central Division Head- quarters 119,685.19 104,635.37 15,049.82 14.4 Douglas Office 45,796.14 31,385.34 14,410.80 45.9 Edgewater Office 62,660.56 52,884.21 9,776.35 18.5 Harrison Street Lot 325.89 325.89 Humboldt Office 42,230.51 30,136.26 12,094.25 40.1 Hyde Park Office 30,354.29 25,927.09 4,427.20 17.1 Irving Park Office 15,298.80 14,031.51 1,267.29 9.0 Kedzie Office 57,814.62 49,822.51 7,992.11 16.0 Lake View Office 54,060.15 44,638.42 9,421.73 21.1 Lawndale Office 59,102.70 46,176.36 12,926.34 28.0 Lincoln Office 93,885.52 74,686.47 19,199.05 25.7 Main Office 398,704.76 385,895.12 12,809.64 3.3 Monroe Office 78,871.34 75,953.19 2,918.15 3.8 North Office 65,405.01 53,653.52 11,751.49 21.9 Northern Division Head- quarters 36,061.56 33,544.00 2,517.56 7.5 Oakland Office 71,843.79 66,958.61 4,885.18 7.3 Pole Yard, 70th St. and Monroe 211.24 211.24 South Chicago Office 13,586.23 8,331.37 5,254.86 63.1 Southern Division Head- quarters 45,082.41 Toll and Long Distance Building 523,623.16 Wabash Office 345,443.69 Wentworth Office West Office West Pullman Office Western Division Head- quarters Yard Office . 91,010.01 52,108.08 11,492.30 131.16 58,878.70 39,781.77 490,615.84 299,056.17 97,480.08 47,610.77 10,505.36 60,580.42 5,300.64 13.3 33,007.32 46,387.52 6,470.07 4,497.31 986.94 131.16 1,701.72 6.7 15.5 6.6 9.4 9.4 Total $2,642,405.59 $2,351,728.11 $290,677.48 12.4 84 APPENDIX 10. CHICAGO TELEPHONE COMPANY. Defense of Building Appraisal. Oct. 8, 1912. Prof. E., W. Bemis, City Hall, Chicago, 111. Dear Prof. Bemis: Building Costs. I return herewith typewritten table showing analysis of building costs, as shown by the Chicago Appraisal and also the Chicago Telephone Company's books. As you know, the costs of material and labor entering into the construction of buildings are considerably higher now than in former years. The low building costs of the earlier years of this Company 's history are reflected in the higher reproduction new figures shown in the appraisal, except in those instances where one or more additions have been made to the building, involving construction costs that the appraisers did not make allowance for in estimating the reproduction new cost of the property. Land values in Chicago also have, in general, increased, and such an increase is reflected in the higher present values shown in the appraisal in practically all cases, except where the price paid for the land included building since destroyed, and. of course, not appearing in the appraisal. In such cases the appraisal of the land shows little or no increase, or even a decrease, although land values in the vicinity have gone up since the purchase of our property. T will point out some specific instances illustrating the above statements: Austin: The appraisal shows an increase of 27% in land value, consistent with the increase in land values in this vicinity. This lot was purchased about ten years apo. The building shows an increase of 26 8%, which I think fairly represents the added cost of buildings to-day over the cost of 1904, when this building was erected. Calumet: The land for Calumet was purchased, part about 1891, and part in 1901, and has appreciated very much, principally in recent years since the automobile in- dustry has brought business down into the district. The appreciation shown by the appraisal is 83.3%. and I believe it is very fair. The appraisal shows an appreciation in the reproduction new cost of build- ings of 93.8%. This is brought about by the fact that five old houses and a barn were bought with the land, and were entered in our books at the estimated then value. Naturally, the appraisal and value of reproduction new would be materially higher, and T think that this, with the higher present cost of construc- tion readily accounts for the appreciation. Canal : The 22.8% increase in land value is readily accounted for by the increase in values in the district. The 37.4% increase in building value can be accounted for by the increase in building costs. This building was erected in 1903, when building costs were low. Central: The Central Building was erected in 1905, when building costs were lower than now, and under a favorable contract. The appreciation of 17.4% I believe to be reasonable. 85 Central Division Headquarters: The Central Division Headquarters and Cortlandt street lots were both pur- chased on very favorable terms, and land has since increased rapidly in value. Douglas: This building was erected in 1903, when building costs were much lower than at present, and the appreciation of 45.9% I believe is reasonable. Land values in this district are practically at a standstill. Edgewater : The 53.6% increase in land reflects the rise in land values in this district. Our lot was bought at a favorable price. Harrison Street Lot: This lot, located at Harrison street and Pacific avenue, just at the edge of the business district, has increased very much in value due to the expansion of the business district. Humboldt: This building was erected in 1905, when building costs were low. It was constructed under a very favorable contract. Land prices have also increased. Lincoln: I am advised that the original price of the land included an old building that was afterwards destroyed. This explains the apparent decrease in land value. Other land in the vicinity shows some increase. Main: The land purchased for the original Main also included an old building which was torn down. The land value in this instance would have shown a slightly greater appreciation, were it not for this fact. The main building shows only a small increase in reproduction cost because of the fact that additions have been made, and the extra cost of such additions is not included in the appraisal. The original building was erected in 1887, when building costs were low. Monroe: The Monroe land shows a substantial increase in value, consistent with the other land values in the vicinity. The Monroe building shows a very small in- crease in value. Here again, several additions have been made since the erection of the original building in 1899. The appraisal figure does not take into account the extra costs involved; hence, little appreciation is shown, notwithstanding the fact that the original building and some of the additions were made when build- ing costs were much lower than at present. North: This building was erected in 1900, when building costs were low. There have been no additions. The land shows a small increase in value, and I learn that land values in this district have been nearly stationary. It is possible that an old building may have been included in the original price paid for the land. Oakland: The appraisal figure for Oakland Building is but little over the book value. Several additions were made to the Oakland Building, and the extra cost of these, of course, was not taken into account in the appraisal. The estimated cost to re- produce new, the old flat buildings purchased, fails to much more than make up for this deficiency. Land values in this territory have been practically stationary. South Chicago: The appraisal shows a very small increase, only 2.9%, for South Chicago land, notwithstanding the general increase of values in the district. This is accounted for in the fact that the book figures for land include also the cost of 86 two houses and a barn. One of the houses was destroyed before the present Central office building was erected. The substantial increase in building values of 63.1% is accounted for in the fact that the original South Chicago Building was erected in 1902, when construction costs were low, and further in the fact that the reproduction new estimate includes the cost of reproducing a house and barn now on the property, the original cost of which is included in the land value. South Division Headquarters: The land values in this district have increased very much. The property is on the 55th street boulevard. Toll and Long Distance Building: Although this building was erected in 1908, when building prices were some- what lower than now, the contract was not a favorable one; it was cost plus 10%. As a result, the appraisal figure is but 6.7% in excess of the books. Wabash: The land values in this district have greatly increased in the last three or four years due to the expansion in the business district. This accounts for the increase in value of 50.8%. Wentworth: The original Wentworth Building was erected in 1900, when building costs were low. Several additions have since been made, however, and the appraisal fails to take into account the extra costs involved. Because of this, it shows a decrease of 6.6%. The land value increase of 31.4% is consistent with similar values in the vicinity. West: This building was erected in 1900, when construction costs were low. The small increase of 9.4% is because the appraisal figures fail to take into account the extra cost of two building additions made since then. The land shows a decrease of 36%. While values in this district seem to have remained about sta- tionary, or may have decreased a little, the large decrease in value can prob- ably be accounted for in the fact that an old building was purchased with the lot, and since destroyed, and is included in the book value of the land. I am unable, however, to verify this. West Pullman: This building was erected in 1901, when construction costs were low. The small increase of 9.4% as shown by the appraisal is accounted for in the fact that the figures do not take into account the extra cost of an addition to the building. Western Division Headquarters: The land for these headquarters was bought on very favorable terms, and land values in the vicinity have gone up to a marked extent. Yards: The Yards Building was erected in 1900, when building costs were low. The decrease of 2.8% shown in the appraisal is due to the fact that the appraisal figures fail to take into account the extra costs of making additions since the erection of the original building. Land values in this vicinity have gone up con- sistent with the appraisal figures, showing increase of 33.9%. Yours truly, (Signed) J. G. WEAY, Chief Engineer. 87 APPENDIX 11. EFFECT OF SUBWAY CONSTRUCTION. Oct. 9, 1912 Professor E. W. Bemis, City Hall, Chicago, Illinois. Dear Sir: Telephone Plant Disturbed by Proposed Passenger Subway. Referring to the system of passenger subways, construction of which is pro- posed by the Chicago Harbor and Subway Commission in their report of September 10, 1912, I wish to discuss the plant of the Chicago Telephone Company, which will be destroyed or will have to be abandoned on account of the construction of this subway system. The Harbor and Subway Commission proposes to construct passenger subways in the following streets: In Evanston avenue from Lawrence avenue to Halsted street. In Lincoln avenue from Lawrence avenue to Clark street. In Elston avenue from Kedzie avenue to California avenue. In California avenue from Elston avenue to Milwaukee avenue. In Armitage avenue from 40th avenue to Milwaukee avenue. In Milwaukee avenue from California avenue to Canal street. In Halsted street from Evanston avenue to 79th street. In Clark street from Lincoln avenue to Polk street. In Washington street from Canal street to State street. In Madison street from 40th avenue to Clark street. In Harrison street from Halsted street to State street. In State street from the Chicago River to 55th street. In Blue Island avenue from Ashland avenue to Halsted street. In 22d street from Marshall boulevard to Ashland avenue. In 26th street from 40th avenue to Marshall boulevard. In 55th street from Western avenue to Cottage Grove avenue. In Cottage Grove avenue from 55th street to 79th street. There will also be several short connecting lines which I have not enumerated. The construction of these passenger subways will necessitate the abandon- ment and removal of a rather large amount of telephone underground conduit and underground cable, and I will enumerate below the general locations and amounts of underground plant which will be involved. In Evanston Avenue: From Berteau avenue to Halsted street 2 ducts of conduit and 1 cable. In Lincoln Avenue: From Cullom avenue to Belle Plaine avenue 4 ducts of conduit and 1 cable. In Elston Avenue: From Kedzie avenue to California avenue 6 ducts of conduit and 2 cables. In Milwaukee Avenue: From California avenue to Western avenue an average of 9 ducts of conduit and 5 cables. From Western avenue to Robey street an average of 6 ducts of conduit and 1 cable. From Noble street to Chicago avenue 16 ducts of conduit and 4 cables. From Chicago avenue to Halsted street 28 ducts of conduit and 3 cables. From Halsted street to Canal street an average of 10 ducts of conduit and 2 cables. 88 In Halsted Street: From Grace street to Addison street 2 ducts of conduit and 1 cable. From Wrightwood avenue to Belden avenue an average of 6 ducts of conduit and 2 cables. From Shades place to Blackhawk street 4 ducts of conduit and 1 cable. From Kees court to Division street 1 duct of conduit and 1 cable. From Chicago avenue to Madison street an average of 5 ducts of conduit and 3 cables. From Madison street to Harrison street 18 ducts of conduit and 5 cables. ' From Harrison street to 12th street 18 ducts of conduit and 2 cables. From 12th street to the South Branch of the Chicago River an average of 16 ducts of conduit and 2 cables. From the South Branch of the Chicago River to 26th street 12 ducts of conduit and 2 cables. In California Avenue: From Wrightwood avenue to Milwaukee avenue 3 ducts of conduit and 1 cable. In Clark Street: From Lincoln avenue to Division street an average of 17 ducts of conduit and 11 cables. From Division street to Chicago avenue an average of 27 ducts of conduit and 11 cables. From Chicago avenue to Illinois street an average of 24 ducts of conduit and 12 cables. From Illinois street to Kinzie street 18 ducts of conduit and 15 cables. From South Water street to Washington street an average of 10 ducts of conduit and 1 cable. From Washington street to Van Buren street an average of 15 ducts of conduit and 4 cables. In Madison Street: From 40th avenue to Central Park avenue an average of 7 ducts of conduit and 6 cables. From Central Park avenue to Sacramento avenue an average of 10 ducts of conduit and 6 cables. From Ashland avenue to Canal street an average of 30 ducts of conduit and 17 cables. In Harrison Street: From Halsted street to Clinton street 12 ducts of conduit and 3 cables. From Clinton street to 5th avenue an average of 14 ducts of conduit and 7 cables. From 5th avenue to Sherman street 18 ducts of conduit and 12 cables. From Sherman street to Clark street 48 ducts of conduit and 12 cables. From Clark street to State street an average of 25 ducts of conduit and 16 cables. In Blue Island Avenue: From Harrison street to 12 street 8 ducts of conduit and 2 cables. From 12th street to 14th street 8 ducts of conduit and 3 cables. From 14th to 19th street 10 ducts of conduit and 4 cables. From 19th to 22d street 6 ducts of conduit. In 26th Street: From Whipple street to Springfield avenue an average of 3 ducts of conduit and 1 cable. In State Street: From Madison street to Van Buren street 6 ducts of conduit and 2 cables. From 26th street to 27th street 4 ducts of conduit and 1 cable. From Root street to 43d street 7 ducts of conduit and 1 cable. 89 In Cottage Grove Avenue: From 55th street to 63d street an average of 8 duets of conduit and 1 cable. From 63d street to 69th street 8 ducts of conduit and 2 cables. From 69th street to 71st street 8 ducts of conduit and 3 cables. From 71st street to 75th street 3 ducts of conduit and 2 cables. From 75th street to 79th street 7 ducts of conduit and 1 cable. The passenger subway as proposed at numerous locations will occupy the same streets occupied now by the Telephone Company with its main conduit and underground cable leads; and incident to the destruction of these main telephone underground leads, it will be necessary to abandon certain subsidiary intersecting underground conduit and cable leads that now cross the proposed subway. We estimate that the loss to the Telephone Company, due to the destruction of its underground plant in those streets which the proposed passenger subway will occupy, and the necessary abandonment of subsidiary underground conduits and cables, will amount to approximately $1,840,000.00. This amount is made up of two items; namely, Underground Conduit 675,000.00 Underground Cable 675,000.00 In considering the estimate for the loss of underground cable, account has been taken of the net salvage return, that is, gross salvage less the cost of re- moving the cables, which could be obtained upon the cables involved. With underground conduit there would not be any salvage value and it is further assumed that it would be unnecessary for the Telephone Company to remove it from the streets. In addition to the above amount, which covers the direct loss of plant de- stroyed, it would be necessary to do a large amount of temporary work during the construction of the subways in maintaining our service in various crossings over the obstructed streets. In a number of instances the proposed subways will prac- tically cut our exchange districts into halves and it will be necessary of course at all times to maintain sufficient crossings to enable us to give service to all sub- scribers. We estimate that this item will amount to $250,000.00. These two items, of direct loss on plant destroyed, and the expense incident to maintaining service during actual subway construction work, together, amount to $2,090,000.00 and this figure would represent the estimated total loss to the Tele- phone Company on account of the construction of passenger subways in these streets. All the above estimates have been made on the basis of present telephone plant. In a great many instances, especially where main telephone routes are involved, the provision of required telephone facilities will necessitate the installa- tion of several large sized telephone cables in each year, and any delay in the construction of the subways will result in substantial increases in the losses inci- dent to the abandonment and destruction of the telephone plant involved. I would estimate that the losses which will be involved in subway construc- tion as above outlined, will increase at the rate of at least $100,000.00 per year. Yours truly, (Signed) J. G. WRAY, CB:ET Chief Engineer. 90 APPENDIX 12. THE PLANT AND HOW PAID FOE,* Investment Capital Reserve for Total Year. Dec. 31st. Stock. Bonds. Depreciation. Liabilities. 1881 $ 493,465.99 $ 500,000 $ 500,000.00 1882 563,575.19 500,000 500,000.00 1883 623,606.72 600,000 600,000.00 1884 654,743.16 693,000 693,000.00 1885 732,888.05 762,300 762,300.00 1886 805,318.72 838,600 838,600.00 1887 977,035.47 964,400 964,400.00 1888 1,131,342.03 1,089,800 1,089,800.00 1889 1,302,625.49 1,253,300 l',253,300.00 1890 1,734,212.73 1,754,700 1,754,700.00 1891 2,310,519.66 2,000,000 2,000,000.00 1892 3,415,023.37 3,280,200 3,280,200.00 1893 4,001,039.55 3,796,200 3,796,200.00 1894 4,159,989.38 3,796,200 $ 120,000.00 3,916,200.00 1895 4,521,439.29 3,796,200 200,889.40 3,997,089.40 1896 4,607,909.34 4,336,500 200,889.40 4,537,389.40 1897 4,545,729.82 4,336,500 100,000.00 4,436,500.00 1898 5,174,748.47 4,336,500 474,782.22 4,811,282.22 1899 6,615,922.64 5,000,000 903,934.14 5,903,934.14 1900 8,122,052.61 7,000,000f 421,172.53 7,421,172.53 1901 9,933,480.47 9,000,000 296,432.87 9,296,432.87 1902 12,333,854.20 11,993,400 346,551.32 12,339,951.32 1903 13,909,268.38 14,000,000 646,551.32 14,646,551.32 1904 14,593,186.16 14,000,000 913,825.83 14,913,825.83 1905 15,930,664.83 14,000,000 1,295,155.61 15,295,155.61 1906 18,683,669.11 14,000,000 1,692,066.24 15,692,066.24i 1907 27,007,758.41 16,908,500 1,899,613.46 18,808,113.46^ 1908 29,090,647.83 27,000,OOOU 1,901,739.85 28,901,739.25 1909 31,001,017.78 27,000,000 $0,000,000 1,901,739.25 33,901,739.25 1910 33,737,612.48 27,000,000 5,000,000 3,695,160.95 35,695,160.95 1911 37,137,217.75 27,000,000 5,000,000 4,971,823.19 36,971,823.19 *Working capital for which the Company claims about $1,900,000 is here omit- ted because the exact increase from year to year cannot be definitely ascertained. All of the existing working capital, however, must have been accumulated out of earnings. The figures are taken from Hagenah's balance sheets down to 1900 and thereafter. f$l,000,000 was a stock dividend. JThe following balance must be taken into account for the years 1906 and 1907: 1906. 1907. Surplus $1,073,338.67 Loans from bankers 250,000.00 $5,109,942.69 1,385,000.00 t[$4,500,000 was a stock dividend. $1,323,338.67 $6,494,942.69 91 APPENDIX 13. THE COMPANY'S TREATMENT OP DEPRECIATION. (From Hall's Report, pp. 20-23.) Whatever may have been the ruling policy as regards the anticipation of the future, the records show that a reserve for deferred maintenance was inau- gurated in 1894 to which certain annual credits were made, emanating from the maintenance accounts. These credits continued until 1907 and amounted to $6,765,595.05, made up as follows: Calendar year. Amount. 1894 $ 120,000.00 1895 100,000.00 1898 374,782.22 1899 429,151.92 1900 329,702.13 1901 357,919.39 1902 503,304.95 1903 600,000.00 1904 1,267,274.51 1905 1,187,566.10 1906 1,245,893.83 1907 250,000.00 $6,765,595.05 Of this amount, however, $1,575,000.00 was transferred to surplus, leaving a net credit of $5,190,595.05 as a fund ostensibly for the dual purpose of providing for deferred maintenance and for contingencies. Doubtless, owing to this two- fold character, certain sums were charged each year to the fund and deducted from the investment account, representing estimated depreciation which has taken place, while a steadily increasing balance was allowed to remain in the fund, accumulating to $1,836,714.26 at the close of 1907. The following summary shows the position with regard to the fund, December 31, 1907: Net amount credited to fund $5,190,595.05 Less: Estimated depreciation written off investment as follows: 1895 $ 19,110.60 1897 100,889.40 1900 412,463.74 1901 469,612.35 1902 300,000.00 1903 . '. 300,000.00 1904 500,000.00 1905 400,000.00 1906 700,000.00 $3,202,076.09 Adjustment of maintenance accounts, supplies, etc.. 151,804.70 3,353,880.79 Balance at credit of fund December 31, 1907 $1,836,714.26 It might be inferred from the above that, inasmuch as the investment was being written down to the extent of the above charges, the actual depreciation of the plant, over and above replacements each year, was, in the opinion of the management, developing with considerable momentum. That this view was not altogether steadfast is apparent from the fact that at December 1, 1907, the whole of these deductions, together with certain other credits to investment account which were charged direct to maintenance and to surplus, were reversed, leaving 92 the investment at its original book cost. As a result of this transaction the plant account was increased by the sum of $3,767,233.55, this amount being credited to the surplus account in place of the above reserve, which had contributed practic- ally the whole of the amount. Looking to the fact that this credit to surplus account was diverted from its primary purpose to serve as a means to an end diametrically opposite, namely, the distribution of a stock dividend of $4,500,- 000.00 in the following year, little, if any, importance can be attached to its treat- ment in the accounts of the company as having any bearing on the question of depreciation. Neither can any significance be attached to the balance of $1,836,- 714.26 remaining in the reserve fund, as indicative of the physical condition of the plant at that time. It may have been, and doubtless was, regarded as the nucleus of the fund now standing in the books. The history of the fund from January 1, 1908, to the present time may best be seen from the following synopsis showing how the fund at December 31, 1911, namely, $4,971,823.19, was accumulated: Balance at credit January 1, 1908 $1,836,714.26 From reserve for depreciation of buildings balance as at December 31, 1908 62,899.20 Sundry credits added in 1908 2,125.79 From surplus balance as at December 31, 1909 847,068.84 From maintenance 1910 $1,500,000.00 Less: Eeconstruction and replacements 553,647.14 946,352.86 From maintenance 1911 $1,620,000.00 Less: Eeconstruction and replacements 445,211.75 1,174,788.25 Sundry credits added in 1911 101,873.99 Balance at credit, December 31, 1911 $4,971,823.19 It will be observed that the credit of 1909 consisted of a transfer of the balance in surplus account at the close of that year. The credits for 1910 and 1911 appear to have been regulated substantially by the balance of profit re- maining after meeting all expenses and the eight per cent, dividend, the undivided profit added to surplus for each of these years amounting to $95,072.93 and $102,- 540.31, respectively. In view of all the facts concerning this fund, it is perhaps not irrational to regard it as a general reserve for the purpose of providing for contingencies and for automatically regulating the dividend. Whether or not this fund is adequate for the present purpose may perhaps be best judged from the experience of the company in the past in regard to actual expenditures for main- tenance and renewals. This consideration may be regarded as an element affect- ing the present value of the plant, the other two elements, referred to on page 17, having also to be taken into account in determining the sufficiency of the fund in its complete aspect. This more direct view of the question may be obtained in a study of the actual expenditures in the past in respect of repairs and renewals. The percentage of the average annual expenditure thus ascertained, to the investments which do depreciate may be regarded as the basis for the annual allowance to be set aside for the purpose in view. It should be observed that it is not possible to differ- entiate between current repairs and reconstruction outlay until 'within the last seven or eight years. It is reasonable, however, to assume that although this period may not be sufficiently full to determine an average for reconstruction, it may be regarded as of sufficient duration to give the average for current annual repairs. The average for the total expenditure being determinable, it is thus possible to deduce the average for reconstruction outlay indirectly. 93 CO O CO O CO CO tO O v^ f m OS O O O s * *f~- * IN GO' to' O rH IN O O rH CO 00 _; m *# t- in 2 OS CS 00 CM C<8 O US rH t 1 - CO N CM * CXI rH rH 4X1 tO "H CM CO 1^ 05 os"co" CO^r-^ ^""HS" o 1 o" rH rH rH rH tO CO 'f CXI rH -f O CM O5 co^ q_ T-T 5M co" co^ oT rH rH O CO CO CO tO vS OS US O O CM CO t> rH CXI OS T-H CO' r-J IN CO us' t^ x 2 J^ S S tO GO ^ tO CO CO N CO rH OS t- 00 "^1 ^ -^- W US rH t-^ m W CO r4 rH oo"cT to ^t* o in tO*" IN~uT O 00 co r^ rH rH IN O rH us^eo 00 OS 00^ tO . rH r ^ s cxT co" >o s os / ^ IN IN rH if) O o o m o us o in cxt to v S CO O <> w IN ext t- t- *' CO Tjt t W Ol CO *sT X t to co ~f in t* oo ^oo co *t l> 1-1 O> 9t Ml CO CM to co t- ^. tO tO to' rH GO CO rH ?1 CO C* PH W OS IN rH O CO CO O CO O co o T cToo" CO CM * -T- 00 rH m Tt< OS GO t>^us E w rH rH cxT co" co" to" rM M ^ (N C\ w 4-r C" 1 t- m CM IN O N US O vS ., q q O -^ CO 6^ 00 jj O CO IN i O IN US CO OS ^ rH O tO OS* rH C rH E"" 1 O5 cTcxT co~o p^r-T ^T co"oT 11 ^^ O tO rH t- t- CO o co *** 14 Q OS rH 00 OS CO CO_ U5 C<^ . O > 1 1 r-T rH~ J O rH tO S>! c-. Si" rn" C W rH rH i i e\i o w 5T H N CM Q T3 i i 2 1 ;S S t- 3 C V a o . -< O -u . g Ox O OQ '-G ac i! SO ** '~* 33 a ; ^5 V. aj S C Mr .O 1 '|M a g "3 g ' 2 - a w aj 2 "o c3 S) BJ * fl ?* 1 1 ^ D ^" C Q^ efi ^ ** S _ " S > * a ^ 2 S cT 4 =! ft < ID r3 rt S * ~* E ^ ^ S a ^3 > cS ^ a "2 o ID t5 S .2 "3.S U a -1-* t_ M _a 33 S. a * .2 ' ff) to "3 ' -2 fe a S a^-E7 sj ci & Cj ^ * ' 5 C< a e > x * 2 as 5T .2 .2 a a> O> OC O Jj C O !| .sl at O oT ^ ^ _ o '5 o cs * "^ .& 1 15 S | ^ & & a a S a c ~ ^ fc< O OD 9 99 r3 x O -t (-. ^~* c cS eS _, _so |oDM g _2.J 2 a * 1 * H O '5 C* a V QJ fg O CM S A^ M p. > Q5 uj Ci "3 S <3 < K < 11 1 ^ Hoc H K 94 APPENDIX 15. COMPOSITE LIFE, SALVAGE AND ANNUAL DEPEECIATION. 230 West Washington Street, Chicago, October 24, 1912. Prof. E. W. Bemis, City Hall, Chicago. Dear Sir: Depreciation. Since talking to you this noon we have checked over our depreciation figures very carefully and find the following: Chicago Telephone Company. Appraisal Value of Plant as of August 1, 1911. Chicago Exchange. Chicago Telephone Byllesby & Arnold Life and Salvage. Life and Salvage. Composite Life 5.260% 4.068% Salvage 29.234% 22.863% Annual depreciation allowance 13.455 years 18.961 years Book Values of Plant as of August 1, 1911. Chicago Exchange. Chicago Telephone Byllesby & Arnold Life and Salvage. Life and Salvage. . Composite life 12.802 years 18.318 years. Salvage 29.196% 22.542% Annual depreciation allowance 5.531% 4.228% Note: The percentages in the above tables are based on total plant in serv- ice, including land, but not including working capital, construction in process, tools, teams and supplies, and furniture and fixtures. The depreciation allow- ance is figured on straight line basis. Salvage is made to include land and in- stallation of subscribers' instruments. Yours truly, JGW FF (Signed) J. G. WEAY, Chief Engineer. 95 APPENDIX 16. QUANTITIES OF PHYSICAL PLANT IN CHICAGO AND SUBURBAN TERRITORY, CHICAGO TELEPHONE COMPANY. As of August 1, 1911, According to Appraisal. ACCOUNT 103 REAL ESTATE. Chicago. Suburban. Total. 103-20 Land: No. of tracts 34 22 56 103-10 Buildings: Office buildings 24 14 38 Flat buildings 2 . . 2 Division headquarters 4 . . 4 Switch tracks 1 . . 1 Barns 2 3 5 Miscellaneous . 516 Total . 38 18 56 105 EQUIPMENT. 17 CENTRAL OFFICE OPERATING EQUIPMENT. CHICAGO. SUBURBAN. TOTAL. 2 +2 'eS S "3 O CS O CS O opq ,jpq H !? *'?. B 0> > 4> r-5 S-M CS -^ I cS *j E * 1 j3 O CS O CS O O W JPQ H Common Battery. cS -