TP 
 725 
 
 J-NRLF 
 
 1D3 737 
 
TWENTY-FIVE YEAJIS OF REGULATED MONOPOLY 
 
 Another Gliapter in the Haverhill 
 Gas Case 
 
 CLOSING ARGUMENT OF G. W. ANDERSON 
 
 on the petition of the Mayor and City Council of Haverhill, fora re- 
 daction in the price of Gas before the Board of Gas and Electric Light 
 Commissioners, December 14, 1911 
 
Twenty-Five Years of Regulated Monopoly 
 
 ANOTHER CHAPTER IN THE 
 HAVERHILL GAS CASE 
 
 CLOSING ARGUMENT OF G. W. ANDERSON 
 
 on the petition of the Mayor and City Council of Haverhill, for a reduc- 
 tion in the price of Gas before the Board of Gas and 
 Electric Light Commissioners, December 14, 1911 
 
OUTLINE OF ARGUMENT. 
 
 I. THE PRESENT SITUATION. 
 
 Page 
 
 New management has decreased candle power and heat 
 units and increased pressure so that gas, (i. e., light 
 and heat), is higher today at 85 cents than twelve 
 years ago at $1.00. But the Company has paid divi- 
 dends averaging over 34% since the 80 cent order 
 was made 5-6 
 
 Petition 12 years ago occasioned by Gas Securities scheme 
 of speculators to make $75,000 gas company float 
 $500,000 of bonds and $500,000 stock 7 
 
 New petition occasioned by attempt to have old Company 
 sell out and thus get $900,000 of stock in a Massa- 
 chusetts corporation so as to charge gas consumers 
 permanently at least $54,000 a year for use of only 
 $75,000 \ 7 
 
 Failure of local daily papers to publish truth makes print- 
 . ing of this argument necessary 8 
 
 II. HISTOEY OF ATTEMPT TO SETTLE OLD CASE. 
 
 All tentative plans of Mayor and City Government con- 
 ditioned on : 
 
 (a) Legality of plan proposed by Company 10 
 
 Gas Commission has held it illegal 10 
 
 (b) Capital only for fair value 10 
 
 Company attempted to get about 3 for 1 10 
 
 Good faith of City; bad faith of Company. . . 11 
 Gas Commission tricked into settling 80 cent 
 
 order without notice to gas consumers 12 
 
 Gas Company thus attempted to settle legal 
 
 debt for more than $350,000 by payment of 
 
 $21,000 to consumers 12 
 
 Settlement illegal, vitiated by fraud 12 
 
 New scheme much worse than Securities 
 
 scheme ... 13 
 
III. EEAL ISSUE FAIR PEICE FOR GAS. 
 
 Page 
 
 ( 1 ) Cost at burner 14 
 
 Company refused to give estimates of its 
 
 engineers 14 
 
 Mr. Adams' figures, best evidence, show 55 
 
 cents or less, fair cost 15 
 
 Comparison with other cities and towns 15* 
 
 Adams' figures high 16 
 
 (2) Capital charge, 10% dividend will give 60 
 
 cent gas 16 
 
 "FOREGONE DIVIDENDS." 
 
 Company claims dividends on more than $75,000.00, 
 capital stock, on theory that former stockholders left 
 dividends in to extend plant 17 
 
 No "foregone dividends" in fact, but dividends averaged: 
 first 14 years, 51-5%; next 5 years, 8%; then 10% 
 regularly, from 1898 on 34% 20 
 
 No money except $50,000 original capital ever "risked" in 
 
 business 21 
 
 Stockholders had generous returns, on average of years to 
 
 1898, and extortionate returns 1898 to 1910 21 
 
 REPRODUCTION COST THEORY OF CAPITALIZATION. 
 
 Company claims 14th Amendment of United States Con- 
 stitution overrides Massachusetts law and gives Com- 
 pany return on all it would cost to reproduce property 
 today, even if large part comes from excess earnings. . . -21 
 
 New York Gas Case shows U. S. Supreme Court will not 
 pervert anti-confiscation into fraud and extortion and 
 will enforce rights arising under State law 22 
 
 In Massachusetts capital paid in has always been distin- 
 guished from accumulations of profits 23 
 
 When Gas Companies in 1885 asked legislation to protect 
 them against destructive competitors they agreed, in 
 effect, to rates based on capital stock 26 
 
 After 1885 Gas Commission allowed high rates in order to 
 build up depreciation funds, on express understanding 
 declared in Reports that such excess earnings were not 
 to be basis of rates nor capitalized 27-28 
 
 This depreciation fund theory is found in Gas Commission 
 
 Reports from 1889 to 1910 28 
 
 M25&361 
 
Page 
 
 Haverhill Company now seeks to make the policy of Gas 
 
 Commission a fraud on gas consumers 29 
 
 Attempt is to compel consumers to furnish capital and then 
 
 pay a return on it 30 
 
 Company holds large surplus which should be applied 
 through lower prices of gas to benefit of its equitable 
 owners, the consumers 30 
 
 Gas at 50 cents both legal and just in Haverhill 31 
 
 Gas prices too high in Massachusetts as shown by fact that 
 
 stocks sell at large premiums , . . . . 32 
 
 Lynn has 75 cent gas and stock sells at $415 32 
 
 Fourteenth Amendment Theory is unjust to investors as 
 well as public, will throttle new and much needed 
 enterprises 33 
 
 EEAL REPRODUCTION VALUE OF HAVERHILL 
 
 PLANT. 
 Great value of Adams' evidence 34 
 
 Royce's exaggerations leave no weight to his evidence .... 35 
 
 Chase and Jackson absurd "gas experts" 36 
 
 Real test of Reproduction is cost of equivalent substitute 
 
 plant, located in best available place 38 
 
 Adams' valuation of all property used and necessary to be 
 
 used for gas purposes $350,000, these figures high. .40-41 
 Price paid no evidence of real value. Stone & Webster 
 
 anxious to stop Municipal Ownership in Massachusetts, 
 
 and paid for that and for franchise, not for plant. . 42 
 
 IV. COMPARISON OF 25 YEARS OF PRIVATE AND 
 
 MUNICIPAL OWNERSHIP. 
 For 25 years dividends paid for use of $75,000, average 
 
 22 1-5%, amounting to $416,623.86 43 
 
 But surplus of at least $10,000 a year has also been extorted, 
 
 making average of $26,664.15 per annum or 35.5% on 
 
 capital 44 
 
 Plant could probably have been taken 25 years ago for 
 
 $150,000 or less, which could have been borrowed for 
 
 $7,500 a year 45 
 
 Haverhill could have saved for twenty-five years nearly 
 
 $20,000 a year by owning and operating its own plant 45 
 Private ownership has cost, for capital furnished, more than 
 
 3 l /2 times as much as municipal ownership 45 
 
 "Regulation of private monopoly" has given us piracy; we 
 
 must have municipal ownership 46 
 
CLOSING ARGUMENT OF G. W. ANDERSON 
 
 MR. CHAIRMAN AND GENTLEMEN OF THE COMMISSION : 
 
 After hearings extending over about eight months, the taking 
 of nearly 1600 pages of evidence, besides numerous elaborate 
 tabulations, computations and charts, the time has come briefly 
 to review some salient parts of this evidence and to submit our 
 views as to what is a fair and reasonable price to be charged by 
 the Haverhill Gas Light Company to its consumers. 
 
 I. 
 
 THE PEESENT SITUATION. 
 
 Twelve years ago yesterday I argued for the Mayor of Haver- 
 hill a like petition seeking a reduction in the price of gas. It is 
 interesting to compare the situation then and the situation now. 
 At that time the company was furnishing at $1.00 per thousand, 
 net, gas of an average candle power of 24.3, costing the consum- 
 ers obviously a little over 4 cents per candle power. As a result 
 of the evidence adduced on that petition the Commission ordered 
 a reduction to 80 cents net. The Company refused to obey the 
 order, and brought a bill in equity in the Federal Court setting 
 up the usual allegations of confiscation contrary to the Four- 
 teenth Amendment. To the disgrace of the Commonwealth of 
 Massachusetts, the case was never brought to trial. The con- 
 sumers were left until July 1, 1909 to pay the full price of $1.00. 
 The regulated-price-by-commission order has accomplished noth- 
 ing .for the citizens of Haverhill during these 12 years. 
 
 At the present time the price of the Company to consumers 
 is 85 cents. But the candle power has been dropped so that it 
 is, as nearly as one can make out from the loose and unsatisfac- 
 tory records of the company, probably between 17 and 18 only, 
 or nearly, if not quite, 5 cents per candle power, an increase in 
 cost of at least 15% to 20%; that is, light is costing the con- 
 sumers of Haverhill about 15% more today than it was 12 years 
 ago today. 
 
 As to heat, the evidence is not so clear. We do know that the 
 oil enricher nsed in the water gas (there being no coal gas now 
 
6 
 
 made in Haverhill) has been dropped to 3i/> gallons per thous- 
 and. All the experts agree that heat units diminish as oil en- 
 richer is diminished. It is therefore almost, if not quite, certain 
 that the heat furnished by the Gas Company for gas stoves and 
 other heaters is costing more today than it did 12 years ago to- 
 day. But this is not all : When the present management took 
 control they weighted the holder, increasing the pressure, 
 claiming that this was necessary in order to furnish an adequate 
 supply in Bradford and some other remote districts. If there 
 was such necessity, it grew out of the painful inadequacy of the 
 distribution system, due in considerable part to the fact that the 
 company has an extraordinary amount of three and four inch 
 mains where mains two or three times that size are necessary. 
 Certain it is that in many parts of the city the increased pressure 
 has resulted in bad service, that the gas "blows," that meters 
 revolve more rapidly, that the customer gets less light and larger 
 bills. 
 
 To summarize: The cost of gas, meaning by "gas" heat 
 and light properly available for the customers' use, is much 
 higher in Haverhill today than it was 12 years ago today, prob- 
 abb about 20% higher. 
 
 It is also certain that the new Stone & Webster management 
 that took control about two years ago, has increased the cost of 
 gas, although they have dropped the apparent price from $1 to 
 85 cents ; for they have decreased the candle-power and the heat 
 units, and increased the pressure. 
 
 HOT/ has the Company fared during the 12 years since the 
 previous case was argued and this Board made its futile and un- 
 enforcod order? The capital stock of this company is $75,000. 
 This is all that the stockholders have in any form paid, directly 
 or indirectly, to the establishment and maintenance of this pub- 
 lic utility. The Company passed out of the hands of people 
 whose primary purpose was that of making and distributing 
 gas at a fair profit, into the hands of persons who have held and 
 used their control mainly for speculative purposes, security- 
 making purposes, in 1898 or 1899. During the period between 
 the year ending June 30, 1898, and the year ending June 30, 
 1910, the Company has paid an average dividend of over 34%, 
 something over $25,000 per year. In this sum, of course, is in- 
 cluded the payments made and put upon the books as loans to 
 the Haverhill Gas Securities Company. But my opponents 
 
agree, as indeed they must, that these payments are to be treated 
 as though declared and paid as dividends. 
 
 The immediate occasion of the petition which I had the honor 
 to present for this community a dozen years ago, was the fact 
 that the speculators who had just before that time purchased 
 the M:ock of the Haverhill Gas Light Company had put out, 
 through the device of the Haverhill Gas Securities Company, 
 $500,000 of bonds and had also issued $500,000 of stock, thus 
 endeavoring to transmute a $75,000 gas company into a $1,000,- 
 000 gas securities company, and to sell stocks and bonds to the 
 investing public, the sole basis of value in which was the expec- 
 tation of being able to extort in prices from the Haverhill con- 
 sumers (through the medium of this legalized monopoly sup- 
 posedly under the control of a regulating Commission) sums 
 adequate to pay not only the $25,000 per year upon the $500,- 
 000 of b% bonds, but also a dividend upon $500,000 of stock. 
 This Commission was then, I may say, appalled to discover and 
 to see in concrete form some of the results of 15 years of sup- 
 posed "regulation" of lighting companies in this Commonwealth. 
 Nevertheless, the Board has, during these 12 years, utterly failed 
 to extend the slightest relief to this community. The specula- 
 tive scheme succeeded: This gas-using community has been 
 taxed to pay the interest on $500,000; even the stock is said to 
 have brought a substantial price; so strong is the feeling in 
 financial circles that "regulation" will continue ineffective. 
 
 The present occasion of my being invited to re-present the 
 cause of this community to this Board, is the fact that some two 
 years ago Stone & Webster purchased all the stock and bonds of 
 the Haverhill Gas Securities Company, and with the assistance 
 of ingenious counsel ("hereupon devised a scheme to transmute 
 this $75,000 gas company into a $900,000 gas company; the 
 essential difference between the new scheme as contrasted with 
 the old being that the present gas company was to sell out all 
 its plant and assets, and in legal effect its franchise, to a new 
 gas company, the new gas company petitioning the Board for 
 authority to issue $900,000 of stock, the alleged reproduction 
 cost and value of the assets thus proposed to be purchased, on 
 which $900,000 they made the modest claim of the right to earn 
 a dividend of at least 6%. This obviously would have subjected 
 the consumers of Haverhill to an annual capital charge of at 
 least $54,000 a year, amounting, with a population of about 
 
8 
 
 44,000 or 45,000, to a tax of about $1.20 per capita to be levied 
 upon this gas-using community. Put in another way, the new 
 proposition was that hereafter nearly 75% per annum should 
 be paid upon the only assets contributed by the stockholders, to 
 wit the original capital stock of $75,000. 
 
 Naturally, when this last scheme became publicly known, the 
 community revolted; a mass meeting was held and resolutions 
 passed calling upon the City Council to take legal action to 
 thwart this scheme of permanent extortion. The Commission 
 has already ruled in the proceeding asking for the approval of 
 an issue of $900,000 of stock by the new Company, that the 
 scheme is illegal; and this petition for a reduction in price is 
 now before you for determination. 
 
 Poor gas at a high price, with enormous dividends to specula- 
 tors iri gas securities, are not the only evils from which this 
 community is suffering as a result of private management under 
 legalized monopoly. We find here, as we have at times found 
 almost throughout the Commonwealth, and of which we had 
 long and sad experience in Boston, a public utility company in 
 local politics. We find it in apparent control of part of the 
 local press. Throughout this controversy it has been obvious 
 that the press is dominated by the same interests that dominate 
 this speculative gas scheme. In the local daily paper nothing has 
 been published showing the real situation to the citizens of 
 Haverhill. The news published has been misstatement and dis- 
 tortion. It becomes necessary, in order to let the people of 
 Haverhill know what their city government is really trying to do 
 for them, to have the substance of this argument printed and 
 distributed in pamphlet form to the citizens of Haverhill. 
 
 How long will this or any other self-respecting New England 
 community endure such private ownership and management of 
 a public utility, unless commission control can be made more 
 effective ? 
 
 II. 
 
 THE COMPANY'S BELATED PLEA IN BAE. 
 
 Before beginning his argument yesterday, Mr. Tyler for the 
 Gas Company filed a motion to dismiss this petition, arguing 
 that the Mayor and City Council are estopped to maintain it. 
 All the facts upon which he rests his motion for an estoppel 
 
were known to him and were before the Board at the beginning 
 of the hearings on this petition. It is therefore clear that, even 
 if those facts constituted an estoppel, the Company waived u.~ 
 right by going to trial for eight months at large expense to the 
 city, without any suggestion of an estoppel. 
 
 But I welcome the opportunity afforded by his bringing into 
 this rate case some of the historical facts relative to the earlier 
 petition by the new Haverhill Gas Company for permission to 
 issue $900,000 of stock, to deal briefly with the charge made by 
 Mr. Tyler that there has been lack of good faith on the part of 
 this municipality, or of the Mayor, or of any members of the 
 City Council, in any of their dealings with the men who have 
 bought up the stocks and bonds of the Haverhill Gas Securities 
 Company. 
 
 In substance, Mr. Tyler's claim is that both the City and the 
 Mayor of Haverhill are estopped to claim a price lower than 85 
 cents by reason of certain negotiations had with relation to a 
 settlement of the old controversy. The situation in 1909 was, in 
 brief, that the consumers had been since 1900 paying $1.00 for 
 gas, with a right to recover from the Company 20% thereof 
 unless the Federal Court held this 80-cent order confiscation. 
 This claim amounted to something like $300,000 to $400,000, 
 in my opinion a perfectly valid debt. The City had started to 
 take the plant, municipal ownership was imminent. The plan 
 of Stone & Webster was to settle this claim of $300,000 to 
 $400,000, by rebating 10 cents per thousand from July 1, 
 1909, amounting to about $21,000, then to have the old Com- 
 pany sell out to a new Company, which was to be capitalized 
 at the alleged full value of the assets taken over; the price of 
 gas was also to be reduced on July 1, 1911, to 85 cents; the City 
 was also to get certain additional benefits by way of an agreed 
 amount for taxes and in a lower price for municipal light. 
 
 Obviously, no city government has the slightest authority to 
 contract with any gas company as to the price that shall be 
 charged by that gas company to its customers. All that the 
 Mayor or City Government may do is to institute proceedings 
 for a lower price, as may 25 or more customers. 
 
 But, entirely apart from any inability to contract, neither the 
 City nor any official thereof ever undertook to make any con- 
 tract, ^"or was there any act or failure to act on the part of 
 the Mayor or any city official savoring, to the slightest degree. 
 
10 
 
 of bad faith. Indeed, the men now in control of this situation 
 are the last in the world who can afford to raise in this case the 
 question of "good faith and fair dealings.'' Every possibility of 
 arrangement with the City and the consumers that was even 
 suggested by the Mayor and by members of the City Council 
 was strictly conditioned upon two things : 
 
 (a) That the new Company should "capitalize at an amount 
 not exceeding its full value at the time of acquisition, all such 
 property as it has and from time to time shall have acquired," 
 referring to the property proposed to be taken over from the old 
 company by the new company and used for gas purposes; and 
 
 (b) That the issue of stocks and other securities by the new 
 company should be approved by this Board as legal. 
 
 (See "Franchise" p. 6.) 
 
 In fact, when the proposition was presented to this Board of 
 allowing a gas company to sell out its works and franchises to 
 another gas company established and controlled by the same per- 
 sons. to die that it might live again, an arrangement by 
 which $75,000 of stock was to be transmuted into twelve times 
 that sum. $900,000, the Board held the whole proceeding il- 
 
 But if we concede that coitnsel for Stone & Webster may have 
 erred in believing that he had successfully devised a legal scheme 
 for watering the stocks of Massachusetts lighting companies, a 
 problem which has hitherto defied the ingenuity of all the other 
 numerous able counsel who have for many years sought to ac- 
 complish the same result, and that this error of law involved 
 no breach of good faith on the part of the new owners, what shall 
 we say as to their breach of their undertaking to capitalize at 
 ff not exceeding the full and fair value" of the property taken 
 over, in the light of their attempt to get a capitalization of 
 $900,000 on property not worth for gas-making purposes sub- 
 stantially more than one-third that sum? Is this "good faith" 
 to this community ? 
 
 Nor is this all: The circumstances under which this Board 
 was induced in August, 1910, to consent to the entry of a final 
 decree in the Federal Court enjoining this Board and the At- 
 torney General of the Commonwealth from enforcing the per- 
 fectly valid order of this Board for 80-cent gas, made in 1900, 
 are most extraordinary and, I must say, suspicious. The Board 
 ;n srmie way the circumstances are not fully disclosed 
 
11 
 
 induced by representatives of this Company to assent to chat 
 decree on the understanding on the part of the Board that an 
 arrangement had been made satisfactory to this community. 
 (See decision, April 6, 1911, Stock case, and quotation in Mr. 
 Tyler's argument, p. 1573.) The Board therefore failed to give 
 any public notice to the consumers affected by their act, of their 
 purpose to enter a decree the purpose (and possible effect) of 
 which was to nullify the 80-cent order in which the gas-consum- 
 ers of Haverhill had vested rights. It is most extraordinary, if 
 it be law, that the Gas Commission cannot make an order for a 
 reduction of the price of gas without notice and a public hear- 
 ing; and may legally make an order, or, what is the same 
 thing, assent to the entry of a decree restoring the price from 
 80 cents to $1.00, without notice to the consumers who have 
 paid $1.00 and are legally entitled to 80-cent gas, either as to 
 their past or as to their future rights. I venture to say that the 
 act of this Commission in assenting to that decree was illegal. 
 
 The intended effect of the assent by this Board to the entry 
 of the decree in the Federal Court was precisely the same as the 
 effect of a revising order made under Revised Laws, Ch. 121, 
 sec. 35. That section* provides that this Board may, on the peti- 
 tion of a company, "after notice, give a public hearing to the 
 petitioner, to the city or town and to all other persons interested, 
 and thereafter may pass such orders relative to the price and 
 quality of the gas or electricity thereafter to be furnished by 
 such company as it determines are just and reasonable." What 
 this Board cannot do directly, I submit it cannot do indirectly. 
 I am convinced that the act of the Board in voting to assent to 
 the entry of that decree in August, 1910, was ultra vires and 
 void. I believe that this Company still owes the gas consumers 
 of Haverhill the aggregate of their payments in excess of 80 
 cents. What practical results may follow from these proposi- 
 tions of law, T do not now stop to discuss. I may, however, add, 
 that even if the Company has succeeded in getting releases from 
 the consumers to whom it made the payments out of the $21,000 
 fund, I have no doubt that, on a proper showing of the facts, 
 any court would hold those releases vitiated by fraud. 
 
 It is interesting to note that if the 80-cent order had been 
 enforced, the company would still have made an income ade- 
 quate for a generous return; and also that the 20% excess pay- 
 ment amounts to about double the figures which the Oompnny's 
 
12 
 
 representatives used in the discussions at the time of the hearing. 
 See Table, p. 79-a, from which it appears that in the 11 years, 
 1900 to 1910, the Company's sales of gas amounted to 1,770,113 
 thousands. The total income on manufacturing account was in 
 the same period, $1,820,444. As substantially all these sales 
 were at $1.00 a thousand, 20% in excess of the rate fixed, it is 
 obvious that the debt due the consumers was upwards of 
 $350,000. 
 
 Having said so much, I will also say that I have not the 
 slightest doubt that the Commission acted in good faith and 
 without the slightest suspicion that it was being made a party 
 to what was in effect a fraud upon this community. 
 
 Equally extraordinary was the ability of the representatives of 
 the Company to conceal from the gas-consumers of this commun- 
 ity the fact that it had even been suggested to this Board that 
 such final decree should be entered, until after it was entered. 
 Mr. Essex Abbott, representing a large number of consumers, 
 had, in June, 1910, appeared before the City Council and filed a 
 brief setting up claims of illegality as to the scheme of reorgan- 
 ization, substantially the same as those afterwards sustained by 
 this Board. The decree had been entered several months before 
 he ever heard of it. It was not until I became of counsel for 
 the City, in the winter of 1911, that Mr. Abbott, or, so far as I 
 know, any gas consumer of Haverhill, knew that the new own- 
 ers had, while the legality of the general scheme promulgated by 
 them was still in question, before they had done anything to- 
 carry out even their own promissory representations as to im- 
 proved service, succeeded in putting the barrier of a Federal 
 Court decree between this Company and its creditors to the 
 amount of $300,000 to $400,000. Both the Board and a major- 
 ity of the Municipal Council were tricked. 
 
 The gist of the dealings of this new management with this 
 gas-using community is that they formed an illegal scheme for 
 speculative stock-watering; and by practices which, to use the 
 mildest possible term, may be called sharp practices, to settle 
 with their customer-creditors for about 5 cents on the dollar; to 
 stop municipal ownership, the chief fear of this sort of exploit- 
 ins: manipulators; and then to proceed, in gross breach of their 
 own promise?, to undertake to capitalize at about three times 
 the "full and fair value," the assets, which had already been, 
 in the larger part, paid for by these gas consumers out of earn- 
 
13 
 
 in.L!* far in excess <>!' any reasonable dividends and accumulated 
 as a trust fund for the benefit of both company and customer. 
 
 The gas consumers of Haverhill are not "estopped," by reason 
 of having already endured so many wrongs, from now claiming 
 that hereafter this public utility shall deal with them honestly 
 and fairly. Indeed, this claim of estoppel simply indicates the 
 curious obsession which seems frequently to destroy all sense of 
 justice and fairness in the minds of many of the men who get 
 the control and mangement of public-service utilities. They 
 come to regard every hard-working, thrifty and prosperous com- 
 munity, like Haverhill, as a prey. That amiable and attractive 
 gentleman, Mr. Eobb, gave unconscious testimony to what is 
 really the guiding principles of his firm, Stone & Webster. Dis- 
 claiming that he is a "gas expert" (and therefore in the class of 
 Messrs. Jackson and Chase), Mr. Eobb says, in effect, (p. 1233 
 et seq.), that the value of a gas property for buying purposes 
 may be reached by reckoning $3.00 to $4.00 per thousand on 
 out-put, which makes obviously the value of the Haverhill Gas 
 Company, in decent condition with an out-put of 250,000,000 a 
 year, from $750,000 to $1,000,000. This amounts to saying 
 that his concern really buys gas companies, not on the engineer- 
 ing basis what it costs to build a plant and to make gas in it 
 when built but on the basis of the "charge that the traffic will 
 bear"; that it is the franchises, the right to tax, that is the main 
 consideration. 
 
 When such a community refuses to submit, they set up claims 
 of "unfair dealing" and invoke the Fourteenth Amendment to 
 assist in getting what does not belong to them. 
 
 This stock-watering scheme of the new owners is infinitely 
 worse, in every respect, than the old Haverhill Gas Securities 
 scheme; and it has been promoted by methods and defended by 
 Pharisaical cant that, by contrast, make one almost respect the 
 Securities scheme. Haverhill may expect nothing good from 
 snrh ownership and management as this. 
 
 III. 
 
 THE REAL ISSUE : A FAIE PEICE FOE GAS. 
 
 The foregoing is preliminary and historically interesting: but 
 the gist of this case is, What is a fair price for gas now to be 
 
14 
 
 charged by this gas company? This problem naturally and 
 easily sub-divides into two parts : 
 
 (1) The cost of gas at the burner. 
 
 (2) The capital charge. 
 
 (1) The cost of gas at the burner: 
 
 The improved form of this Commission's reports makes it 
 much easier than a few years ago to determine with approximate 
 accuracy what it ought to cost in any gas company to put gas to 
 the burner. In this case we cannot be guided by the figures of 
 the reported cost in Haverhill during recent years. Apart from 
 the fact that the book-keeping of this Company, under its specul- 
 ative management of recent years, is entitled to little or no 
 credence as to many important items, the fact that the Stone & 
 Webster management have junked the old manufacturing plant 
 and put in a new water-gas plant, is a conclusive admission on 
 their part that the old costs are no guide in determining the fair 
 cost for the future. The new management claims to have the 
 highest kind of engineering talent. The Stone & Webster En- 
 gineering Corporation is charging large sums to this Gas Com- 
 pany which they potentially own, for advising it and for consult- 
 ing with themselves about the management, for themselves, of 
 this property. Even if we discount from their claims, we are 
 fully justified in assuming that the rehabilitated plant is to be 
 dealt with as an efficient, fairly economical and properly man- 
 aged plant. If it fails of efficiency or proper management, it- 
 should make no difference to the consumers; the owners must 
 pay the penalty of either inefficiency or improper mismanage- 
 ment. 
 
 Repeatedly, before and during the hearing, I sought to obtain 
 the estimates of these expert engineers as to what it would cost 
 to put gas to the burner, when they had completed their rehabili- 
 tation of the plant, as they did during the early summer of 
 1911. Their neglect and refusal to give that estimate argues 
 against the good faith and frankness of which their counsel 
 makes so much protestation. 
 
 The best evidence as to the fair cost in Haverhill is found in 
 the expert testimony of Mr. Alton D. Adams and in a compari- 
 son of reported costs in other Massachusetts companies. Mr. 
 Adams estimates that gas at the burner will cost this company 
 a little less than 55 cents. This computation is carefully made 
 
15 
 
 and, indeed, in many items, such as Purifying & Water, Cost 
 of Meter Takers, Public Gas Lamps, Incidentals, Insurance & 
 Taxes, is based upon the actual results in the old plant, and also 
 reckoned an output of only 203,000,000 feet when the actual 
 output for the first year which would be affected by any order 
 that you will make will be about 250,000,000 feet. Moreover, 
 his estimate of taxes should be reduced. This item of 5.39 cents 
 per thousand is based upon the assumption that all the property 
 upon which taxes are levied is used for gas purposes, whereas in 
 fact they have some $40,000 of investment in real estate not 
 used at all for gas purposes. He figures for repairs and renew- 
 als or depreciation 11 cents per thousand feet, which is, for a 
 company of this kind and in such a condition as the other side 
 claim this plant to be, too large, even if we do not assume that 
 there is any depreciation fund applicable to current depreciation 
 charges, a topic which I shall touch upon later. On these and 
 other grounds, which I cannot now go into in detail, his estimate 
 of 55 cents cost at the burner is too high. This also appears by 
 comparing the actual, reported, results in some of the other 
 larger companies of Massachusetts, shown in the following table :' 
 
 TABLE BASED ON RETURNS FOR YEAR ENDING JUNE 
 
 30, 1910. 
 
 Nam* 
 
 Sales of 
 
 Cost at 
 
 Sales per mile of 
 
 Cities 
 
 Gas 
 
 Burner 
 
 main thousands 
 
 Boston 
 
 ....5,023,906,546 
 
 .48486 
 
 5568 
 
 Cambridge . . 
 
 . . . . 670,000,000 
 
 .59325 
 
 4375 
 
 Charlestown 
 
 238,229,775 
 
 .66894 
 
 4079 
 
 East Boston 
 
 242,000,000 
 
 .67774 
 
 3590 
 
 Fall River.. 
 
 . . . . 498,000,000 
 
 .54502 
 
 4230 
 
 Lawrence . . . 
 
 418,000,000 
 
 .65244 
 
 2717 
 
 Haverhill . . . 
 
 203,000,000 
 
 .74829 
 
 3247 
 
 Lowell 
 
 574,000,000 
 
 .57959 
 
 3430 
 
 Lynn 
 
 606,000,000 
 
 .47377 
 
 4286 
 
 Pittsfield .... 
 
 112,000,000 
 
 .75948 
 
 2075 
 
 Maiden . . 
 
 420 000 000 
 
 .56008 
 
 2478 
 
 New Bedford. 
 
 . ... 360,400,000 
 
 .62833 
 
 3698 
 
 Springfield . . 
 
 563,000,000 
 
 .58058 
 
 3187 
 
 Taimton . . . 
 
 107 000 000 
 
 .71301 
 
 1721 
 
 Worcester 
 
 638.000.000 
 
 .53240 
 
 3940 
 
 It is matter of common knowledge that most, perhaps all, of 
 the gas companies of Massachusetts, unless it be the Boston 
 
16 
 
 Company, are still charging up more to operating expenses than 
 is necessary to cover repairs and depreciation; that the figures 
 in this table are, therefore, higher, and not lower, than the 
 actual cost. But without any such allowance, it is obvious that 
 the cost of gas at the burner in Haverhill is fairly comparable 
 with the cost in Lowell, Lynn, Maiden, Springfield and Worces- 
 ter. Is is true that the output in all of these cities is somewhat 
 larger than in Haverhill ; but when a company is as large as the 
 Haverhill Company, selling about 250,000,000 feet a year, its 
 manufacturing efficiency approximates to the maximum; mere 
 increase in size grounds few additional economies. Lynn and 
 Fall River have also some advantages in freight charges on coal 
 and other purchases. But Lynn's (about) 47 cents is lower than 
 HaverliilPs estimated 55 cents, after due allowance for water 
 transportation and for larger output in Lynn. Fall Eiver is the 
 only other purely water-gas plant in Massachusetts. 
 
 The cost of distribution should be low in Haverhill; its sales 
 per mile of main are high, in thousands, 3247, compared with 
 Lowell's 3430, Springfield's 3187, Worcester's 3940, Brockton's 
 '1658, East Boston's 3590, and Taunton's 1721. 
 
 Remember also that the candle-power in Haverhill has been 
 much reduced. This Commission cannot, as I .understand it, 
 compel the furnishing of gas above 16 candle power. If a com- 
 pany chooses to furnish a low grade of gas, approximating the 
 legal minimum, as this Company has apparently chosen, the 
 price must be made accordingly. You are not now dealing with 
 a candle power of 24.3 as you were 12 years ago; you are dealing 
 with a management whose motto seems to be, "Less light and 
 more money/' 
 
 We ask the Commission to find that the cost of gas at the 
 burner, in this company properly managed and with no exorbi- 
 tant salaries paid and charged up, or other such speculative 
 schemes worked into the management as this Commission re- 
 cently condemned in the North Adams case, will not exceed 55 
 cents. 
 
 The relations of this company to the Stone & Webster Engi- 
 neering Corporation demand the most critical scrutiny. The 
 engineering and other expenses are exorbitant; they remind one 
 unplrnsantly of some of the salaries paid by the old Boston Com- 
 y under the Addicks regime. 
 
17 
 
 (2) What is the basis of the capital charge? 
 
 The capital stock of the Haverhill Gas Light Company is but 
 $75,000. For the ensuing year this would amount to about 35 
 cents per thousand sold, the lowest capital per thousand of any 
 company in the Commonwealth. Obviously a 10% (which is 
 generous) dividend upon the capital stock amounts to S 1 /^ cents 
 per thousand feet as a capital charge. Haverhill is therefore en- 
 titled to a price considerably lower than any other city of the 
 Commonwealth, unless the capital charge is to be reckoned upon 
 some other basis than the capital stock of the company. Sixty 
 cents per thousand feet is a high price for gas in Haverhill, reck- 
 oning large dividends upon the only contribution that stock- 
 holders have ever made to the establishment and maintenance of 
 this public utility, and assuming for the moment that past ex- 
 tortions are in no way to be punished. 
 
 The claim on the other side is that, not the capital, but the 
 alleged value of the property, without regard to whence that prop- 
 erty came, is to be the basis of the capital charge. They make 
 this claim on two grounds : The first is what I call the "Four- 
 teenth Amendment Theory of Capitalization/' with which I 
 shall deal later. The other is the "Theory of Foregone Divi- 
 dends." 
 
 (a) "Foregone Dividends/' 
 
 More concretely, they claim that the old stockholders of the 
 Haverhill Gas Light Company, citizens of Haverhill long since 
 dead and gone, did not get the dividends that they were entitled 
 to out of this company; that therefore the present owners are 
 entitled to compute and compound those foregone dividends, and 
 take to themselves the benefit of that which was foregone by 
 their deceased corporate ancestors. In substance, they allege 
 that the thrifty and hard-headed Yankee shoemakers who in the 
 early decades of the life of this Company owned it, were not 
 sufficiently intelligent and selfish to take their just deserts, but 
 sacrificed themselves to the Gas Company to such an extent that 
 the present owners are entitled now to profit out of their sacri- 
 fices. They present an elaborate chart prepared by Mr. Harvey 
 S. Chase, hung upon the wall, from which it appears that that 
 ingenious gentleman has figured out that the capital stock plus 
 profits which ought to have been taken out, and were not, was. 
 
18 
 
 on July 1, 1910, not $75,000, but $578,067. By the same in- 
 genious method Mr. Chase has figured that on June 30, 1887, 
 when the books of this Company, directed only by the inferior 
 intelligence of hard-headed citizens of Haverhill, showed $91,- 
 878.07, it really ought to have had assets on its books of $255,- 
 857. It is true that in order to reach these interesting and 
 amazing results. Mr. Chase has guessed two basic things : First, 
 he guesses what part of the charged operating expenses, from 
 1859 down, were really not operating expenses but construction 
 charges, and changes the book-keeping according to his guess. 
 Second, he guesses that a proper depreciation charge from 1859 
 down was 6.6 cents per thousand feet of gas. 
 
 In passing. I note that this figure of 6.6 cents per thousand as 
 applied to a small gas company in the crude days of the '60s and 
 '70s is 20% less than the 8% cents per thousand which the 
 present management would charge present consumers as neces- 
 sary to keep up this large rehabilitated company now selling 
 about 250,000,000 feet a year, indeed, Mr. Chase, on cross- 
 examination, admitted that 6.6 per thousand feet was altogether 
 too small in the earlier years of the corporation, and, again con- 
 tradicting his employers, asserted that it was too large in the 
 later years. As he takes this depreciation charge each year for 
 the purpose of carrying forward and compounding the balance 
 remaining as though it were an addition to capital, it is manifest 
 that the smaller he makes it in the earlier years, the larger the 
 hypothetical capital that he thus achieves. But Mr. Chase is 
 not disturbed by the fact that the depreciation charge is wrong 
 at both ends ; but, with the imperturbable logic of the judge who 
 said, on returning from the circuit, "There were some verdicts 
 for the plaintiff that ought to have been for the defendant, and 
 some for the defendant that ought to have been for the plaintiff, 
 but on the whole justice was done," Mr. Chase insists that his 
 depreciation charge is all right throughout the fifty odd years 
 of the Company's life. 
 
 But I will not spend time in dealing with the logic of a man 
 who makes two obverse wrongs equal one right. Mr. Eobb's 
 ingenious computations went upon the same basis. 
 
 The theories are ridiculous; the results figured have no rela- 
 tion to actual facts. The plain truth is that this corporation 
 had, when it first began to make returns to this Commission, 
 assets carried of a book value of $91,878.07 and doubtless worth 
 
19 
 
 somewhat more than that sum. The following table shows some 
 interesting facts relative to the life of this corporation : 
 
 Year Capital 
 stock 
 
 1887 75,000 
 
 188S 75,000 
 
 1889 75,000 
 
 1890 75,000 
 
 1891 75,000 
 
 1892 75,000 
 
 1893 75,000 
 
 1894 75,000 
 
 1895 75,000 
 
 1896 75,000 
 
 1897 75,000 
 
 1898 75,000 
 
 1899 75,000 
 
 1900 75,000 
 
 1901 75,000 
 
 1902 75,000 
 
 1903 75,000 
 
 1904 75,000 
 
 1905 75,000 
 
 1906 75,000 
 
 1907 75,000 
 
 1908 75,000 
 
 1909 75,000 
 
 1910 75,000 
 
 *Note: In 1910, pending the success of the new stock watering 
 scheme, the new management practically stopped dividends. 
 
 But it should be said with relation to this table, that without 
 doubt during the earlier life of this corporation and until some- 
 time in the '90s the policy of the corporation was to charge off 
 more to operating expenses than the real cost, and therefore to 
 carry their assets at less than their actual value ; that the policy 
 of the corporation since 1898 or 1899, when it went into the 
 hands of speculators, has been to carry their assets as worth more 
 than the actual value. 
 
 The question of the present relation of this corporation's capi- 
 tal stock to its assets is further confused by the recent large ex- 
 penditures in building a new and enlarged manufacturing plant 
 and extending the mains, and the utter failure of the Company 
 to show what book-keeping entries they purpose making as to 
 these expenditures. They say that they have expended some- 
 
 Total Book 
 
 Assessed 
 
 Dividends paid 
 
 Assets 
 
 Value 
 
 Dollars 
 
 91,878.07 
 
 . 122,500.00 
 
 7,500.00 
 
 150,927.33 
 
 122,500.00 
 
 7,500.00 
 
 167,752.24 
 
 122,500.00 
 
 7,500.00 
 
 186,272.46 
 
 151,700.00 
 
 7,500.00 
 
 215,896.98 
 
 164,000.00 
 
 7,500.00 
 
 232,562.00 
 
 165,150.00 
 
 7,500.00 
 
 248,598.81 
 
 165,150.00 
 
 7,500.00 
 
 251,309.03 
 
 165,150.00 
 
 7,500.00 
 
 273,605.27 
 
 165,150.00 
 
 7,500.00 
 
 286,473.25 
 
 168,550.00 
 
 7,500.00 
 
 297,377.73 
 
 169,800.00 
 
 9,750.00 
 
 389,579.08 
 
 173,625.00 
 
 37,500.00 
 
 401,101.26 
 
 168,050.00 
 
 22,500.00 
 
 395,500.00 
 
 315,100.00 
 
 33,008.44 
 
 411,862.52 
 
 320,775.00 
 
 27,000.00 
 
 394;254.92 
 
 320,450.00 
 
 25,000.00 
 
 392,956.45 
 
 320,050.00 
 
 25,000.00 
 
 420,529.70 
 
 320,050.00 
 
 25,000.00 
 
 434,069.20 
 
 320,050.00 
 
 25,890.42 
 
 582,174.60 
 
 355,200.00 
 
 25,000.00 
 
 605,237.10 
 
 374,600.00 
 
 25,000.00 
 
 627,415.90 
 
 424,600.00 
 
 25,000.00 
 
 663,756.67 
 
 438,200.00 
 
 12,500.00 
 
 764,871.99 
 
 439,525.00 
 
 975.00* 
 
thing just under $250,000, or over $300,000, one cannot make 
 out from their evidence which, nor did Mr. Tyler appear to know 
 when I asked him during his argument yesterday. How much 
 of that they charge to current expenditure, how much they 
 charge against the "depreciation reserve" item which has stood 
 on the books for some time, how much if any of it is carried as 
 a debt which, on any theory might form the basis of an applica- 
 tion for a bond issue or for new stock, we are left in doubt. 
 But, in order to figure, for the purpose of the present point, 
 some sum as representing the approximate surplus of the cor- 
 poration, I take the figures of the valuation given by our expert, 
 Mr. Alton D. Adams, as showing the real value of this property 
 on June 30, 1911. Mr. Adams figures that the value of the prop- 
 erty used and necessary to be used for gas purposes on that date, 
 which includes the recent reconstruction made by Messrs. Stone 
 & Webster, is $350,000. In addition to that, the corporation 
 owns land on Essex Street and on Merrimac Street, said to be 
 assessed for about $40,000, and has some quick a'ssets not neces- 
 sary to be used for gas purposes, aggregating in all $82,000, 
 which, in figuring the surplus, must be added to the $350,000, 
 making $432,000. round figures, total assets. From this, in 
 order to reach the surplus, I deduct the $75,000 capital stock, 
 getting $357,000; and if there are debts properly incurred as a 
 result of the reconstruction which might be capitalized, those 
 debts also should be deducted; in any event, such debts must be 
 small, and the surplus of this corporation must be at least $250,- 
 000 to $300,000. Is this surplus fund or such part of it as is 
 reasonably necessary to be used in making gas, made up of "fore- 
 gone dividends ?" We say no. 
 
 Mr. Chase's chart shows that for the first 14 years of the busi- 
 ness of this corporation the stockholders received an average of 
 about 51/0%; for the next five years a little over 8%; then the 
 Directors put the stock upon a regular 10% basis, which was 
 never varied from until the speculators got the property, except 
 in the year 18S2 when it was 5%, and the year 1897 when it was 
 12%. Beginning with 1898, as is obvious from the above table, 
 the stockholders have been taking out of this property about 
 34% a year. If, therefore, we should cut loose from business 
 practices and talk about "moral obligations," it is manifest 
 not that the consumers owe the stockholders anything for "fore- 
 gone dividends," but rather that the recent stockholders owe the 
 
present and future consumers for the extortions of these 13 
 years of 34% dividends. Down to 1896 the stockholders had re- 
 ceived an excellent return on their money, including adequate 
 pay for all the risk they ever ran. Only $50,000 was ever risked 
 anyway ; for the increase of the capital about 1873 from $50,000 
 to $75,000 was nothing but a new investment; that new money 
 could doubtless have been obtained on a 5% or 6% basis. 
 
 Moreover, these stockholders took dividends that contented 
 them doubtless all that their consciences permitted them to 
 charge their fellow citizens for the economic service they were 
 rendering. 
 
 No part of the capital of this Gas Company consisted of "fore- 
 gone dividends" for the simple reason that none have been "fore- 
 gone." "You cannot turn the mill with the water that has past." 
 
 (b) The Fourteenth Amendment Capitalization Theory. 
 
 Passing the Foregone Dividend claim, we come to the broad, 
 far-reaching proposition that the Fourteenth Amendment to the 
 Constitution of the United States makes utterly immaterial all 
 questions of the capital stock of this corporation, all contribu- 
 tions or investments, initial or subsequent, by stockholders; 
 that the only constitutional basis for rate-making is the repro- 
 duction cost of the property used in the public utility. The 
 claim is that the whole public-corporation policy of this Common- 
 wealth is immaterial so far as the basis of rate-making is con- 
 cerned ; that the Fourteenth Amendment to the Constitution of 
 the United States, as construed by the Supreme Court of the 
 United States, is the supreme law of the land, and over-rides 
 Massachusetts statutes, Massachusetts Supreme Court decisions, 
 and, of course, the decisions of this Commission. 
 
 It is time that the Commission dealt in no unmistakable 
 terms with the attempt to capitalize the surpluses of lighting 
 companies in this Commonwealth under the threat of this Four- 
 teenth Amendment theory of capitalization. Only in degree is 
 it less important in other cities and with other companies than 
 in Haverhill. 
 
 I venture the confident assertion that the whole proposition is 
 groundless, and that a fair analysis of the carefully guarded 
 opinions of the Supreme Court of the United States will con- 
 vince any sound-thinking lawyer that it is groundless. Not 
 here undertaking to review many of those decisions in detail, I 
 
direct this Commission's attention to the New York Gas case, 
 Wilcox vs. Consolidated Gas Company, 212 II. S. 19, and the 
 way in which the Supreme Court of the United States there 
 dealt with the claim that the value of the franchises of the Gas 
 Company were property on which a return must be allowed in 
 fixing a price for gas. The court below held that the franchises 
 were property on which a return should be reckoned, and allowed 
 $12,000,000 as their value. About $7,000,000 of this sum was 
 for franchises which the State of New York had permitted to be 
 capitalized at a previous consolidation in 1884 and on which 
 securities had been issued to bona fide investors without notice 
 of any claim that their securities were not well grounded upon 
 substantial values. But the Supreme Court, in dealing with the 
 claim that a return should be reckoned upon the full value of 
 the franchises, while holding that franchises are property, re- 
 jected utterly that they are property on which, under the Consti- 
 tution, a return is necessarily to be allowed. On the contrary, it 
 held that, as the value of the franchises depended entirely upon 
 the exercise of the legislative power to fix rates, in a rate-regula- 
 tion case the franchises were not to be reckoned at all; but (and 
 this is the important point for our present purpose) finding 
 that the State had agreed in 1884, for the purpose of allowing 
 stocks and bonds to be issued, upon a value of something over 
 $7,000,000 for the franchises as they then were, they held that 
 the State's action in that regard was binding upon all the par- 
 ties. The result was that the franchises were excluded from the 
 basis of computation except so far as the State's policy, acted 
 upon by the parties, had made such franchises property ; on that 
 point the Supreme Court held all parties bound by the agree- 
 ment which had been in good faith entered upon and executed by 
 all parties. 
 
 No clearer declaration could be made by this great Court that 
 in dealing with its anti-confiscatory power under the Fourteenth 
 Amendment, it deals with corporate rights as they are shown to 
 exist under the state law which has created the corporations and 
 undertaken to regulate them. The Supreme Court has held in 
 unmistakable language that regulation cannot be perverted into 
 extortion. 
 
 Smyth vs. Ames, 169 U. S. is, on fair analysis, an authority 
 for our contention, though frequently cited as laying down in 
 dogmatic language the reproduction cost theory. The Court 
 
23 
 
 says (inter alia) "What the company is entitled to ask is a fair 
 return upon the value of that which it employs for the public 
 convenience." But the Company "employs for the public/' etc. 
 only that which it furnishes for the public; and the whole im- 
 port of this case is against any such fraud as permitting trust 
 funds to be wrested from the uses for which they were accumu- 
 lated. Smyth vs. Ames is really a decision against rates based 
 on artificial values in stocks and bonds not representing real 
 property. 
 
 No decision has been or can be cited in which the Massachu- 
 setts Supreme Judicial Court or the Supreme Court of the 
 United States has held that rates must be based on property 
 furnished by the customers and not by the stockholders. 
 
 Compare also the Knoxville Water case, 212 U. S. 1; the 
 Cumberland Telephone case, 212 U. S. 414, and the cases 
 therein cited. 
 
 In the light of these decisions, it would be useless to spend 
 time in citing and differentiating the dicta from the numerous 
 inferior courts, many of them dealing with cases where the 
 property was taken, many of them with the construction of local 
 statutes, not one of them applicable to a Massachusetts cor- 
 poration, which is controlled only by Massachusetts law, unless 
 that law be inconsistent with the fundamental law of the nation. 
 
 The Supreme Court of the United States only needs to have 
 pointed out to it the historical incidents of the agreement be- 
 tween public and investor, and the public policy of this Com- 
 monwealth under which our gas companies have been created 
 and maintained, in order to reject utterly the theory that in 
 Massachusetts the reproduction cost of the property, and not the 
 investment of the stockholders, is to be the basis of rate-making. 
 
 For, note briefly some of the salient facts concerning our 
 Massachusetts corporations. At the outset, our corporations 
 must be distinguished from the corporations of almost every 
 other state, for that all of them (down to 1903) were formed, 
 on what is in effect an anti-stock-watering law, that is, the 
 capital stock had to be paid in in cash or in property taken as 
 the' fair equivalent of cash. The stocks and bonds of Massa- 
 chusetts corporations have, therefore, always in legal theory 
 represented actual values. The capital stock of Massachusetts 
 corporations has been held to be impaired whenever property 
 of the corporation was in value less than the amount of the stock 
 
and debts. Compare,, for instance, the report on the West End 
 case by the Eailroad Commissioners 1898 Keport, p. 140. See 
 also the line of cases cited in the brief of opposing counsel in 
 the Stock case, pp. 17 et seq., among which are Hemenway vs. 
 Hemenway, 181 Mass., 406. The cases cited there show that any 
 amount of surplus above the capital and debts of a corporation 
 has never been deemed to be capital stock, but simply an accu- 
 mulated profit, which, being distributed, went to the income- 
 taker and not to the remainder-man. In other words, our 
 Massachusetts corporation law has required that the stock- 
 holders should pay in, in cash or its equivalent the par value of 
 the capital issued, and has always kept that capital and its repre- 
 sentative carefully distinguished from any accumulations from 
 any other source. 
 
 Quite other has been the theory in other states, where stocks 
 and bonds have been issued practically without reference to the 
 capital paid in. It is largely because of this lack of relation be- 
 tween capital paid in and capital stock, that the Courts have 
 been compelled to go as far as they have toward the reproduction 
 value theory. 
 
 Coming now to the claim that at some time or other a right 
 accrued to the stockholders of Massachusetts gas companies to 
 have something other than their investment considered the 
 capital upon which rates are to be made, it is obvious that there 
 may be a difference between the theory prior to 1885, when 
 these corporations became legalized monopolies under the con- 
 trol of this regulating Commission, and the theory after 1885. 
 
 First, as to the legal status of gas companies before 1885, 
 before they were made legalized monopolies: Before 1885, 
 Massachusetts gas companies were nothing but manufacturing 
 corporations, having revocable rights in the streets of our cities 
 and towns, having no public duties and charged with no public 
 trust. Compare Commonwealth vs. Lowell Gas Light Company, 
 12 Allen, 75, a decision made in 1866. Their property was of 
 the most precarious nature ; at any time any city or town might 
 revoke their rights in the streets, which would make their plant 
 substantially valueless. Whenever their profits loomed large, 
 there was danger that some competitor might come in; and, as 
 they could" not extend their field beyond the city or town, 
 obviously competition would have the most destructive effect. 
 The result was that conservative directors of prosperous gas 
 
25 
 
 companies were, before 1885, building up all the surplus they 
 could, having in mind the possible destruction of their property, 
 not merely by electric light competition, explosion, obsolescence, 
 and other kinds of depreciation, but, worst of all, the possibility 
 of competition. To realize the situation, re-create in your minds 
 the state of terror into which Mr. Addicks threw the holders of 
 gas stocks in Metropolitan Boston when he came to Boston in 
 1884 and threatened competition by the Bay State Gas Com- 
 pany. It was not very unreasonable for Directors before that 
 time to seek to put, as the old Boston Gas Company sought to 
 put, a large sum of money into real estate and elsewhere, which, 
 in case of destruction, by competition, of their property used 
 for purely gas purposes, might enable them to liquidate to their 
 stockholders substantially at par. In fact, although most of the 
 companies were charging off to operating expenses large sums 
 which for continuing gas making purposes might have been 
 carried to surplus account, it is doubtful if the fair market 
 value of the gas properties in this Commonwealth, under the 
 existing legal conditions before 1885, was worth any more than 
 the investments shown by the stocks and debts. 
 
 It is pertinent also to have in mind that the act of 1885, 
 making these concerns legal monopolies, was not the direct re- 
 sult of a public demand for regulation by Commission, but was 
 legislation enacted at the behest of the Gas Companies for the 
 purpose of securing their property against the destructive re- 
 sults of competition. The corporation managers came to the 
 Legislature and said, in effect, that their private interest in 
 having their property protected against competition was co- 
 incident with the public interest in not having the streets dug 
 up by competing companies ; they therefore sought to have these 
 corporations made, in their respective communities, legalized 
 monopolies, agreeing on their part that if this monopoly power 
 should be given to them, they would become public-service cor- 
 porations, serve all without discrimination and charge fair rates 
 only. The Legislature assented to this proposition. 
 
 But it cannot be too emphatically stated that the law which 
 ma,de these concerns legalized monopolies was a law enacted 
 primarily to protect private property, and that the public regu- 
 lation was the consideration of the grant to the private interest. 
 
 Did, or did not, these corporate managers at the time when 
 they sought and obtained this grant of legalized monopoly and 
 
26 
 
 agreed that thereafter only just and fair rates should be charged, 
 agree by necessary implication that the basis of those fair rates 
 should be the capitalization of Massachusetts corporations, or 
 that some other and different basis should be adopted ? Put in 
 another way: Was the investment theory of capital, or the re- 
 productive cost theory, agreed upon between the Commonwealth 
 and the investors as the basis for rate-making when the legal 
 status of these corporations was radically changed in 1885. 
 
 Bear in mind that the value of the property of these gas 
 companies was, by the granting of the legalized monopoly, much 
 increased ; that the passage of the Act laid the financial founda- 
 tion for putting back on the books assets which had been pre- 
 viously charged off, the thing which Mr. Addicks did in 
 Boston. 
 
 If there was the slightest legal or moral foundation for the 
 claim that the new rate-making power was to be exercised on any 
 other basis than that of the well-ascertained basis of the capital 
 stock of Massachusetts corporations, good faith required that 
 the corporation managers should then and there make that 
 claim. There was not a corporation manager in the Common- 
 wealth of Massachusetts who would have dreamed of having the 
 supreme arrogance to suggest that the new rate regulation 
 should be based upon anything more than the capital stock, 
 the investments paid into these gas companies. If you could 
 conceive of the making of such suggestion, no legislator would 
 have received it with anything but scorn and laughter. 
 
 Put in a word: In 1885 the gas companies of this Common- 
 wealth passed out of the competitive field into the rate-regulat- 
 ing field, with an agreement between the corporations and the 
 Commonwealth that rates should be based upon the established 
 Massachusetts theory of capital stock paid in in cash or in 
 property taken at the equivalent of cash; that no accumulations 
 or surplus funds, from whatever source derived, were, for rate- 
 making purposes, to be deemed to be capital; and, conversely, 
 that if any of the gas companies to which the new theory was 
 applicable had impaired their capital, that the impairment of 
 that capital must be considered in the making of any rate, just 
 as it was considered by the Eaiiroad Commission in the West 
 End case in 1897. Nor at that time would the directors of any 
 gas company have assented to the proposition, if it had been 
 asserted by the Commonwealth, that the new rate-making was 
 
27 
 
 to be based upon the reproduction value of the property of any 
 gas company,, and not the original investment, if by reason of 
 misfortune or excusable mismanagement that property had be- 
 come of lessened value. Indeed, it is highly probable that, because 
 of the drop in the price of pipe and other parts of the plants, 
 many of the gas companies in the Commonwealth of Massachu- 
 setts in 1885 had property of substantially less value than the or- 
 iginal investment. The owners of the stocks of those gas compan- 
 ies would have thought themselves hardly treated if the new regu- 
 lating theory had taken as its basis, not their investment, but 
 the then value of the property. They would have said, and 
 justly said, that when< they put into the public service their 
 money in good faith, unless they ought to be penalized for mis- 
 management or grossly bad judgment, they were entitled to get 
 that money back with a fair return thereon; and I venture to 
 say that no sound-thinking man in this Commonwealth would 
 have questioned the justice of that claim. No one ever did 
 question the justice of this claim until speculators saw that. these 
 corporations had large surpluses accumulated, and then set up a 
 new theory, as unsound and as unjust to investors as it is to 
 consumers, as the basis of their claim for capitalizing surpluses. 
 Second. Does the policy adopted in 1885 and enforced by 
 this Board ground a claim that something other than the invest- 
 ment in the corporation should be the basis of the rate-making ? 
 Quite the contrary. As soon as this Board began to exercise its 
 price-regulating power, the corporations urged upon the Board 
 that they be permitted to charge prices for gas more than ade- 
 quate to cover the reckoned operating expenses and to provide 
 for reasonable current dividends, because of what they claimed 
 were the risks of the business, some of the greatest of those 
 risks being (a) the destruction of their property by the competi- 
 tion of electric light, (b) the risk of explosion, (c) the risk of 
 obsolescence. They asked for an insurance against these risks, 
 for a depreciation fund to cover these and all other risks, many 
 of which have proved to be largely imaginary. The argument 
 that a price somewhat larger than was necessary to cover the op- 
 erating expense and reasonable dividends, the' surplus to go into a 
 fund possibly to be used for depreciation and to cover risks, and, 
 if not so used, to constitute a trust fund for the benefit of the 
 consumers and thus to keep the capitalization low, was a very 
 taking argument, and it prevailed with this Board. 
 
28 
 
 Again, note that tins public policy also was adopted not 
 avowedly in the interest of the consumers, but at the request of 
 the corporation managers. Whether this policy was or was not 
 sound, the Board publicly adopted it, urged thereto by the gas 
 corporations. It went into the reports of the Board as early as 
 1889; all your rate-regulation, from that time to this, has been 
 upon the express basis that a reasonable dividend upon the 
 capital paid in (the investment) should be the capital charge, 
 and that surplus funds accumulated out of excess earnings were 
 a trust fund, a return upon which was no part of the capital 
 charge to be reckoned in a fair price for gas. 
 
 The following language from the Annual Eeport of 1889, p. 
 24, expressed this doctrine with absolute clearness: 
 
 "The stockholders of a company are entitled only to 
 fair and reasonable dividends on the actual amount of 
 cash they have paid in. The money used in the exten- 
 sion and improvement of the plant, paid out of surplus 
 earnings, should not be capitalized, but should be used 
 for the benefit of consumers in reducing the price of 
 gas." 
 
 "Here, twenty-two years ago, was the clear and definite state- 
 ment made by this Board to the effect that surplus earnings 
 "should not be capitalized but should be used in reducing the 
 price of gas'' There could be no clearer declaration of the 
 public policy of this Commonwealth. Apparently all of the gas 
 companies of the Commonwealth joined in urging this doctrine 
 upon the Commission. None, until within the last few years, 
 have ever dissented from it ; and then only when in the hands of 
 speculators who were seeking to capitalize the surplus already 
 too great. 
 
 Similar language, applying the same doctrine in various 
 cases litigated, is found almost all through the reports. I cite, 
 without quoting in extenso the language used, the following: 
 1890, the Amherst Gas case; 
 1894, the Springfield Gas case; 
 
 1894, the East Boston Gas case. In this case the Commis- 
 sion called attention to the fact that such surplus not only 
 enabled a lower price to be given, but "gives strength to the 
 corporation . . . and that it should not be treated as the ex- 
 clusive property of either" corporation or the consumers. 
 
29 
 
 See also the Report for 1894,, the Roxbury, So. Boston & 
 Dorchester cases. 
 
 1895, the Cambridge Gas case. 
 
 1895, the Haverhill Gas case. In this case the doctrine was 
 pushed even beyond the limits originally laid down, and, as I 
 think the Board now concedes, beyond reason. The Board then 
 said: "The consumer for the time being of any well-managed 
 quasi-public corporation gets advantages from the payment made 
 to the company by the consumers of the past. The consumer 
 of the future should therefore be regarded by the board of con- 
 trol, and enough should be paid by the present consumers to pro- 
 vide for the natural growth of the community." 
 
 The mandate then issued to the effect that the consumers of 
 Haverhill should love their children and provide capital for fur- 
 nishing them with gas, has been fully complied with. The pres- 
 ent difficulty is that the speculative interests now in control of 
 the Haverhill Gas Company are seeking to divert this capital 
 furnished by the ancestors of the present consumers, to their own 
 benefit. 
 
 See, also, the Report for 1895, the Worcester Gas case. 
 
 1896, the Melrose Gas case. 
 1901, the Haverhill Gas case. 
 
 1901, the Special Lynn report. 
 
 1902, the Worcester Electric case. 
 1910, the Beverly case. 
 
 We have, then, a case where the public policy of this Common- 
 wealth has permitted the creation of these surplus funds to se- 
 cure the corporations and their stockholders against actual or 
 hypothetical risks, with the distinct agreement and understand- 
 ing that they were not to be capitalized, but were to be held in 
 trust to meet the contingencies for which, in part at any rate, 
 they were accumulated, and if not so used, for the benefit of the 
 consumers. 
 
 The question presented by this and other cases today is, 
 whether this Board is, of its own option, to reverse itself, to 
 transmute the exactions which it has permitted during a quarter 
 of a century into extortions. Avowedly it has approved the 
 levying of prices for gas higher than was necessary to pay the 
 cost of manufacture and a reasonable return upon the capital 
 furnished by the stockholders of the corporations. If, now, that 
 excess in price is to be transmuted into capitalization, it amounts 
 
30 
 
 to retroactive rack-renting of the gas consumers of the Common- 
 wealth. It makes the policy of the Commonwealth a fraud ab 
 initio. 
 
 Now I submit that, although this policy was, in the light of 
 subsequent histor} 7 , erroneous, it was entered upon by this Com- 
 mission in entire good faith, urged thereto by the corporate in- 
 terests of the Commonwealth; that these corporations and none 
 of them can now be heard to say that that policy shall be made 
 a fraudulent one; that this Commission would stultify itself, 
 officially and personally, if it gave ear to such a proposition. 
 
 When the anti-confiscation powers of the Supreme Court of 
 the United States are invoked, and the Court is called upon to 
 deal with any question of local public policy or express or im- 
 plied agreement between a state and its corporate creatures, it 
 will deal with each situation as it finds it; if a value for fran- 
 chises has been made by the state whose regulation is under at- 
 tack, part of the property on which rates must be based, that 
 Court will refuse to allow that property to be confiscated. By 
 the same token, if excess contributions have been made by con- 
 sumers under an agrement that they shall be held for the benefit 
 of consumers unless required for a depreciation fund, this Com- 
 mission may safely assume that the Supreme Court of the United 
 States will not make itself a party to a breach of an agreement 
 or to working a fraud upon the gas-consuming public. Confisca- 
 tion is really nothing but fraud; the Supreme Court will pro- 
 hibit it. Extortion is another form of fraud; that Court will 
 not assist it. 
 
 I conclude, therefore, that there is, and has for many years 
 been, in the City of Haverhill a surplus fund, and that in it the 
 gas consumers have an equitable right. I stand in my argument 
 of this case on the doctrine laid down by the Commission in 
 1889 and ever since, that this surplus cannot be capitalized, 
 either directly or indirectly, and that therefore a rate must be 
 made allowing no return upon the surplus accumulated out of 
 the excess prices hitherto paid by gas consumers of this com- 
 munity. 
 
 Assuming then that you are to stand by the policy you have 
 established and are to protect the trust funds you have caused 
 to be created, what return to capital must now be reckoned in 
 the price of gas in Haverhill? In answering this question con- 
 sider three points : 
 
31 
 
 (a) Any proper system of regulation penalizes mismanage- 
 ment,, of which extortion is the worst sort, as it rewards effi- 
 ciency and moderation in charges for the use of capital. This 
 Company has paid 34% dividends for 13 years; no more divi- 
 dends should be allowed out of current earnings until the aggre- 
 gate of these 13 years of extortions' pro-rate a fair return over 
 the past and a dividendless future. They have "eaten their 
 cake." You cannot treat them as you would a company that 
 has paid only reasonable dividends during these 13 years. To 
 reckon in the price for gas 10% on $75,000, the old and gener- 
 ously-reasonable dividend rate, is to say that corporation sin has 
 no wage of penalty, is to offer a reward for like extortions by 
 other corporations, for that the worst that can happen to such 
 corporations is to have a period of extortions ended by a return 
 to the primrose paths of generous dividends. 
 
 (b) There is still in existence a depreciation fund too large; 
 it should be reduced ; this can only be done by putting the price 
 so low as to permit no dividends out of current income. 
 
 Dividends to a reasonable amount, however, could legally be 
 paid and charged to the surplus or depreciation account. If this 
 policy resulted in a debt, that is no objection; such debt might 
 in time be properly the basis of new capital. This goes on the 
 assumption that no excessive dividends have in fact been paid, 
 contrary to the truth. But it relieves present consumers from 
 any further present contributions for capital account ; it permits 
 them to have back in the form of reduced prices part of what 
 has unjustly been extorted from them. It is just and legal that 
 this should be done. 
 
 Obviously, under either of these theories, the price for some 
 time to come cannot exceed 50 cents. 
 
 (c) But an argument not sound can be made to the effect 
 that the extortions of the past are irremediable," that the present 
 depreciation fund should be kept intact; that therefore the cor- 
 poration should be put back on a generous dividend basis reck- 
 oned on its capital of $75,000. On this theory the price of gas 
 would be not over 58 cents 60 cents would be excessive, it 
 would include a dividend of more than 10% to this much sin- 
 ning corporation. 
 
 No one will now claim that excessive prices should continue 
 to be charged in order that a further surplus may be built up to 
 furnish new temptation for new speculators. This Commission 
 
32 
 
 has in the last few years been plainly taught that the successful 
 administration of a public-service utility requires that excessive 
 profits are as great a danger as inadequate profits. Inadequate 
 profits discourage new investment. Excessive profits invite into 
 the public-utility field speculators, and drive out investors 4 What 
 we want in this Commonwealth is that our public-utility securi- 
 ties should be absolutely safe and that the return thereon should 
 be uniform ; it should never be great, nor should it ever be small. 
 I am well aware that the proposition of 60-cent gas will cause 
 hysterics, but you must face the facts. When I first argued for 
 $1.00 gas, nearly 20 years ago, the suggestion was greeted with 
 scorn and laughter. Yet everybody knows today that the Lynn 
 Gas Company is making more money than it ought to make on 
 75-cent gas. Look at the quotations of the stocks of our gas com- 
 panies. I cut the following from a recent issue of the Banker & 
 Tradesman : 
 
 Par. Bid. Asked. 
 
 Abington & Rockland Light & Power Co 100 190 195 
 
 Cambridge Elec. Light Co 100 295 300 
 
 Cambridge Gas Light Co 100 . 270 275 
 
 Charlestown Gas & Elec. Co 50 122 125 
 
 Edison El. 111. Co., Brockton 100 199 202 
 
 Fall River Elec. Light Co 100 197 200 
 
 Fall River Gas Works Co 100 310 315 
 
 Fitchburg Gas & Elec. Lt. Co 50 120 125 
 
 Lawrence Gas Co 100 208 210 
 
 Lowell Elec. Light Corp 100 210 215 
 
 Lowell Gas Light Co 100 297 300 
 
 Lynn Gas & Elec. Co 100 415 420 
 
 Mass. Lighting Companies 100 124 126 
 
 New Bedford Gas & Edison Light Co 100 300 305 
 
 Pittsfield Electric Co 100 190 200 
 
 Springfield Gas Light Co 100 275 280 
 
 Worcester Elec. Light Co 100 280 285 
 
 Worcester Gas Light Co 100 290 295 
 
 You may safely assume that when the stocks of the corpora- 
 tions under your control reach a market value of two or more 
 times the par value, regulation has failed adequately to protect 
 the public rights. When Mr. Prichard's Lynn Gas Company 
 sells gas for 75 cents and its stock is still selling for $415, it is 
 high time for this Commission to make some radical rulings rela- 
 tive to the fair price of gas. 
 
 The Commission should not overlook that it is making rulings 
 
33 
 
 not merely for the present, but for the future. Nothing could 
 be blinder and more fatuous than the policy now urged by many 
 who claim that they represent "capital and enterprise and stand 
 for conservative theories." The simple test of both justice and 
 expediency between the investor and consumer is this: What 
 must the public pay for the use of capital in order to have the 
 investor willing and anxious to continue to put it at the public 
 service ? Wise administration seeks merely to put consumer and 
 investor on good trading terms. No one will go into a new en- 
 terprise for the public benefit, involving a risk, as most new en- 
 terprises do, unless, if success be reached, more than a mere 
 interest or investment rate be allowed as a return upon the cap- 
 ital. Hazard must be paid for. It follows, of course, that the 
 original capital invested in a public utility that succeeds is en- 
 titled to have substantially more than an interest or mere inves- 
 ment rate, and that right continues to attach to the original 
 capital invested. It does not attach to subsequent moneys put 
 in for the extension of the enterprise after the day of hazard has 
 passed and the corporation can consequently obtain all the money 
 that it needs at ordinary investment rates. 
 
 Now, this Fourteenth Amendment theory of capitalization 
 will throttle and destroy new enterprises and prevent the public 
 from getting the benefit of new utilities. For illustration, we 
 need in New England, as they already have in the West, heating 
 plants, sending heat through pipes in the streets. Suppose that 
 $1,000,000 be invested in this enterprise in this City of Haver- 
 hill with a public franchise in the streets of Haverhill, all the 
 money being carefully invested in the plant itself so that in the 
 beginning there is actually $1,000,000 of property offered for 
 the public use. It begins to depreciate instantly. Pending the 
 struggle to educate the public into the merits of the new enter- 
 prise, the investors lose year by year for five years $100,000 
 ur, until at the beginning of the sixth year there is only 
 $500,000 of property invested in this public utility. Then the 
 heat-users invoke the Fourteenth Amendment theory and a rate 
 must be made on a capitalization of $500,000 only. The invest- 
 ors have lost irrevocably one-half of their $1,000,000. It is im- 
 material that the enterprise then begins to succeed and profits, 
 without exorbitant rates, begin to be made. The rate is based 
 upon the $500,000 of property. The heat-users owe no duty as 
 to the half million of dollars lost. 
 
34 
 
 Such a policy is unjust and inexpedient both. As, between 
 investors and heat-users, when the enterprise finally begins to 
 achieve success, a rate should be made, not to give a return upon 
 $500,000, but as nearly as may be upon $1,000,000, and the 
 gradual accumulation of a fund to make up the $500,000 already 
 lost, until the entire investment is restored, and a rate made so 
 as to give a fair return upon the entire investment of $1,000,000. 
 The community served by capital risked should, if the service 
 proves to be a really valuable and successful one, return to the 
 investor all the capital risked with a return thereon measured 
 fairly in the light of the risks taken as one chief factor. 
 
 This Commission is, and for some years has been, under 
 a tremendous pressure to abandon a sound and just policy mak- 
 ing for new investments in new enterprises, making for the de- 
 velopment of all kinds of public utilities as yet hardly dreamed 
 of, in order to open the field for a conscienceless exploitation of 
 surpluses, actual and alleged, of existing utilities, all the hazards 
 for the development of which were long ago paid for, and which 
 are now required but to be managed carefully and conservatively, 
 although of course progressively. The policy urged upon this 
 Board is a revolutionary one, destructive of real enterprise; it 
 would put a premium on speculation ; it would discourage sound 
 investment and prudent management. 
 
 THE EEAL REPRODUCTION VALUE. 
 
 But, in view of the fact that the Commission felt bound to 
 admit the evidence offered by the Company as to the reproduc- 
 tion value of its property, and also somewhat because of the fact 
 that this community has been lobbied into a delusive belief as to 
 the enormous value of the accumulation, I felt required to have 
 a valuation made by a competent expert in whose fairness and 
 judgment the Commission would have some confidence. Mr. 
 Alton D. Adams is that expert, and as to him I desire to say a few 
 words : This Commission recognizes the difficulty of getting on 
 the public side of these questions any man who has had long 
 experience in the building and management of gas companies. 
 Nearly all gas engineers are tied up with the capitalistic inter- 
 ests; they cannot afford to take the consumer's side in these 
 ratf < ' for the public that there is a man of 
 
 Mr. Adams's ability, training, experience and absolute integ- 
 
35 
 
 rity, a man from whom one cannot get an opinion with the 
 slightest taint of dishonesty in it ; a man for whom one's respect 
 grows as one knows him more. I am glad to say this about Mr. 
 Adams. In this case and on this question of reproductive cost, 
 Mr. Adams, both in ability and in fairness, stands in striking 
 contrast to the witnesses on the other side. 
 
 As to Mr. Eoyce, though undoubtedly under some circum- 
 stances a competent engineer, it is enough to say that he is a 
 party to the exploitation scheme ; and that therefore his evidence 
 given here is entitled to little weight. His original statement put 
 in in the stock case for the purpose of getting $900,000 more of 
 capital stock, and repeated in this case, is in essentials absurd. A 
 few typical instances only: 
 
 He values the meters at $52,332, more than the cost, new, 
 without any depreciation whatever, although meters are testified 
 to have a life of only 25 years and many of the meters in use 
 must be of that age. Services, $45,000, with no substantial de- 
 preciation. He had in his estimate of mains, perhaps an in- 
 advertence, as the others were not, a large quantity of wrought 
 iron as cast iron. The following table prepared by Mr. 
 Adams shows the way Mr. Eoyce figures when fixing up a perma- 
 nent load for the backs of Haverhill gas consumers. 
 
 Some values given by F. P. Eoyce on old Haverhill Gas Maine 
 and on Springfield Mains. See Springfield gas case, March, 
 1905, No. 438. Document 5. 
 
 Inch Springfield Haverhill Ft. in Excess value 
 
 Main Cts. per foot Cts. per foot Haverhill Haverhill Rate 
 
 3 30 50 97,398 $19,479 
 
 4 40 60 80,519 16,103 
 6 60 80 75,529 15,105 
 8 80 100 756 151 
 
 10 100 125 18,328 4,582 
 12 150 175 1,534 283 
 
 16 200 250 3,247 1,623 
 
 $57,326 
 
 Moreover, in the Springfield case Mr. Eoyce's cost for cast iron 
 pipe was from $27.00 to $29.00 per ton; whereas it is now worth 
 $22.00 per ton, i. e., in the Springfield case iron was worth 
 about 25% more. Allowing for this difference in the cost of iron 
 it will be observed that Mr. Eoyce's Haverhill figures are in 
 many instances nearly double his Springfield figure?. 
 
 }lr. Ivovro's valuation is entitled to no serious discussion. 
 
36 
 
 As to gas experts Chase and Jackson, it is impossible to speak 
 without laughter. Mr. Chase is undoubtedly a good book-keeper. 
 He holds himself forth as a "certified accountant;" and a certi- 
 fied accountant, as nearly as one can make out, is one who claims 
 to be an expert on everything, from running the United States 
 to managing a Dipsomaniac Hospital. We had to wait for him 
 a while, as he was in Washington helping President Taft man- 
 age the United States. He undertook to qualify himself as a 
 gas expert. He said in the early part of his testimony that he 
 was a gas expert. After he had been cross-examined a little 
 while, he concluded (and said) that he ceased to be a gas expert 
 20 years ago. 
 
 Professor Dugald C. Jackson is Professor 6f Electrical Engi- 
 neering in the Institute of Technology. I have no reason to 
 doubt he is a good professor of Electrical Engineering. He said 
 he had never testified as an expert in a gas case before; and I 
 suggest that, out of regard for his own reputation and that of 
 the Institution of which he is a member, he should never so 
 testify again. We had to wait for him a while as he was in 
 London advising the British Government in its weightier mat- 
 ters. He seemed to have an impression that by giving a list of 
 the learned societies with which he is connected and making his 
 direct testimony reek with statements of the "care" that he had 
 exercised, even stating that he had gone around the streets to 
 verify the Company's maps of mains, the cross-examination 
 would be formal only, and that his ipse-dixit would be taken as 
 the last word by this Commission. Before I had finished with 
 him on cross-examination, I found that he knew next to nothing 
 about gas matters; that he had taken the heavier weights of 
 water pipe instead of the weights of gas pipes for all the under- 
 ground mains; that he figured his reproduction cost on the 
 mains, not upon the present values, but upon an alleged average 
 of 27 years, some $5.00 a ton higher than the present price; 
 that he testified to taking the average price because, as he put it, 
 it would be "unfair" to take the present prices, they being lower ; 
 that he indicated his fairness as between investor and public by 
 asserting in the same breath that he took the present values of 
 land, although much higher than the cost values. It is no won- 
 der that the Highway Commission is in trouble, when it has as 
 an adviser an alleged expert who, in dealing between public 
 utility and user, takes the cost when the cost is higher, and the 
 
37 
 
 value when the value is more than the cost, so that the con- 
 sumer must lose, and cannot profit, out of the reproduction- 
 value theory. 
 
 I eliminate from serious discussion gas experts Chase and 
 Jackson. A prettier pair of parroting poseurs were never pre- 
 sented for the purpose of promoting or protecting the perpetra- 
 tion of any predatory project. 
 
 It is no wonder that Mr. Tyler in effect abandoned these two 
 witnesses in his final argument yesterday, and put the stress of 
 his claims on what Mr. Prichard of the Lynn Gas Company 
 said. 
 
 What shall be said as to Mr. Prichard's evidence in the case? 
 Of course, Mr. Prichard is a very competent gas engineer. I 
 cross-examined him in the Salem case some years ago; and I 
 know of his adroitness in being on both sides of the same prop- 
 osition of minimizing depreciation charges when assisting the 
 Holyoke Gas Company to get a high price for its plant; and 
 magnifying depreciation when helping the Salem Company get 
 a high price for gas. He is as unfair as he is competent. 
 
 The circumstances of his appearance in this case make his 
 testimony of no weight. Eepeatedly during the summer, Mr. 
 Tyler, when I was urging the completion of the case, said he had 
 no other witnesses except Mr. Eobb, and got delays on his assur- 
 ance that his case was substantially completed. The Company, 
 not the City, raised the issue of reproductive value on its Four- 
 teenth Amendment theory. To meet that claim on the facts we 
 put on Mr. Adams in rebuttal. We know no sur-rebuttal in 
 Massachusetts trials. The Gas Company was bound to put in 
 all its evidence on value before it rested its case. Yet, in the 
 face of both express agreement and waiver of right by resting 
 his case before Mr. Adams gave his evidence on valuation, it 
 wa? sought to put in Mr. Prichard's views of value to affect the 
 weight of Mr. Adams' irrefutable figures and opinions, and 
 thus to get "both ends and the middle" of the trial. A fair 
 sample of the "fairness" of this Gas Company's dealings ! When 
 the Commission made its astounding and unprecedented ruling 
 admitting Mr. Prichard's evidence, I refused (and properly) to 
 cross-examine, to drag this case over many more weeks of trial. 
 The result was that Mr. Prichard gave a garbled and inaccurate 
 statement of some parts of Mr. Adams' evidence, demolished 
 some men of straw; and that farce ended. This Commission 
 
38 
 
 knows that if Mr. Prichard were faced on cross-examination, as 
 he would have been if he had been produced in order, by his 
 evidence in the Holyoke case, he could not have increased Mr. 
 Adams' careful and conscientious estimate of the reproductive 
 value of this plant. 
 
 There is no evidence in this case comparable in weight with 
 that of Mr. Adams. It will be worth all that this trial has cost 
 the people of Haverhill to have at last on the record the com- 
 petent and careful testimony of this capable and conscientious 
 man as to the real value of this gas plant for gas-making pur- 
 poses. When next they deal with the question of municipal own- 
 ership they will have some reliable guide as to the probable 
 amount they will have to pay for the property they have already 
 in large part paid for. 
 
 Moreover, every member of this Commission is a real gas ex- 
 pert. We join with the Company in requesting that the Com- 
 mission make a finding as to the fair value of the property used 
 and necessary to be used for gas-making purposes. Not that 
 such finding is necessary to a proper decision; but to show any 
 Court into which this Company dare take either the stock-water- 
 .ing case or the rate case, how extensive and groundless is the 
 scheme of extortion now being promoted. <c Let there be light !" 
 Set forth the real facts. 
 
 What is the full and fair reproductive value of the property 
 of this Company for gas-making purposes, not for some other 
 purposes and including only property used and necessary to be 
 used for gas-making purposes ? The test is, what would willing 
 purchasers having like franchises and rights in the streets pay 
 for this plant rather than build another one on the same site 
 or on another site? It matters not what it would cost to re- 
 duplicate the particular parts of this plant; no unbiased and un- 
 forced purchaser would pay the cost of putting two 3 or 4-inch 
 pipes in the same street when one 6 or 8-inch pipe is needed. 
 Nor is the site to be taken at its value for other purposes; for 
 gas-making it is worth no more than land equally available for a 
 gas plant can be bought for. 
 
 Mr. Eoyce admits, though unwillingly, that this is the true 
 method; but neither he nor any other witness for the Company 
 followed it. See p. 424, where he says, in, reply to a question 
 "as to whether an old company can under any circumstances be 
 entitled to receive a return upon a larger valuation 
 
than a new company could furnish equivalent facilities for/ 7 
 "No, I don't think they could." 
 
 Mr. Adams states his results in two parts, first valuing all the 
 existing property used and necessary to be used, at its value for 
 gas-making purposes, and on the assumption that it is subject 
 to no depreciation because of non-adaptation to the needs of this 
 gas-using community, i. e., that a new company would build 
 exactly this sort of plant; that therefore every part has full cost 
 value except as lessened by age and use. On this basis his sum- 
 mary is as follows: 
 
 SUMMARY. 
 Value of the Plant of the Haverhill Gas Light Company as of 
 
 June 30, 1911. By Alton D. Adams. 
 
 Plant Items. Totals. 
 
 Land $11,488 
 
 Buildings 58,176 
 
 Holders 105,585 
 
 Tanks 6,204 
 
 Boiler Plant 5,267 
 
 Machine Tools 642 
 
 Gas Machinery 51,524 
 
 Works Pipes 12,290 
 
 Mains and Services 151,809 
 
 Meters 31,713 
 
 Furniture, Horses and Wagons 3,737 
 
 $438,435 
 6 per cent for Engineering, Interest, etc 26,306 
 
 $464,741 
 Deduct amount for excess capacity 36,172 
 
 $428,569 
 Add for Working Capital 20,000 
 
 $448,569 
 
 This summary of values is based upon the theory that all 
 property referred to therein is used and necessary to be used for 
 the gas business; that is, no depreciation has been allowed by 
 reason of inadaptation of any part of this property to the actual 
 and prospective needs of a company making and distributing gas 
 in Haverhill. It therefore greatly exceeds the value which a 
 willing purchaser, having an exclusive right to do the gas busi- 
 
40 
 
 ness in Haverhill, would pay for this property rather than build 
 a substitute plant. 
 
 Mr. Adams testified that, testing the value of this property by 
 what the willing purchaser, having his option either to buy or to 
 build a substitute plant, would be justified in paying, i. e., what 
 he would advise a capitalist coming new into Haverhill to pay 
 for this plant rather than to build a new plant in a new location, 
 he would have to discount $100,000 from the values above stated, 
 making the total value of the plant, used and necessary to be 
 used for gas-making purposes, not exceeding $350,000. 
 
 A few of the main reasons for this substantial discount are, 
 that the removal of the plant from the Winter Street site is inev- 
 itable within a few years, long before the buildings and the 
 machinery there located will wear out. The location of the hold- 
 ers is not a good one. Moreover, the manufacturing plant is now 
 some distance from the holders; in cold weather there is waste 
 in running two steam plants. This inevitable removal will cause 
 tremendous loss not only on the buildings, but also in the mains 
 around the works, necessitating a readaptation of a considerable 
 part of the distribution system. It is common knowledge in 
 Haverhill that this removal has been under discussion for very 
 many years, probably for 15 years; and, indeed, Mr. Eoyce ad- 
 mits that his concern carefully considered removing before they 
 re-habilitated the plant in the old location, and expects that 
 before very many years they will have to move. In spite of this, 
 however, they have put an excessively large water-gas plant on 
 this little, narrow strip by the railroad, thus putting the Haver- 
 hill Company entirely at the mercy of the makers of the price 
 of oil, instead of putting in a mixed coal-and-water-gas plant, 
 as the best engineers are now doing in cities the size of Haver- 
 hill. A pure water-gas plant is not worth, in proportion to its 
 cost, as much as a mixed coal-and-water-gas plant. In this con- 
 nection I may say that I find myself forced to the conclusion that 
 a substantial part of the recent expenditures made have been 
 made, not from the engineering standpoint, but from the stock- 
 watering standpoint. 
 
 Moreover, the distribution system in Haverhill is bad. It has 
 a larger percentage of small mains than almost any other city 
 whose figures are available. In many streets there are two small 
 mains where there ought to be one large one; of course leakage 
 and repairs are much larger. The distribution system of Haver- 
 
41 
 
 hill cannot be figured upon the value of the iron laid, less depre- 
 ciation by reason of age ; a large deduction must be made by rea- 
 son of inadequacy and ill-adaptation to the needs of the com- 
 munity. Mr. Adams makes a deduction of 20% from his figure 
 of $151,000 for the mains, and a still larger deduction on the 
 buildings, works, pipes and gas machinery. 
 
 The plain truth is that this plant is a badly located, poorly- 
 adapted water-gas plant, that it has been badly engineered for at 
 least a dozen years. The more one examines into the details, the 
 more mythical and groundless do the claims of large values made 
 in recent years become. 
 
 My own view, if I may venture to express it, is that Mr. 
 Adams's figures are still too high. It seems to me that if you 
 test the value of this property as you would test, for instance, the 
 value of a cotton mill where no public franchise was involved, 
 having always in mind that the test is whether the old should be 
 bought or a new substitute should be constructed, that the value 
 put by Mr. Adams on this old plant would not be paid by any 
 purchaser having a free choice. 
 
 Note also as to the summary, that it puts the value of the 
 land, not at what the actual site on Winter Street may be worth 
 for a shoe factory or for some other purpose, but the maximum 
 price at which another company coming to Haverhill could obtain 
 a site adapted to gas purposes. Really Mr. Adams figured at 15 
 cents a foot for an adequate area; but the evidence showed that 
 there were several perfectly available sites which probably could 
 be obtained for one-third of that figure. He does not include 
 in this valuation of property, used and necessary to be used for 
 gas-making purposes, certain items of property that the present 
 company actually owns but does not use, nor need to use, for gas- 
 making purposes. These items of property, of course, are addi- 
 tional assets belonging to the Company, which the Company can 
 sell or dispose of as they please; but which are not, properly 
 speaking, a part of the gas-making plant. The chief items of 
 this rejected property are Essex Street land, $15,000; Merri- 
 mas Street land, $25,000; supplies and merchandise, $29,613, 
 mostly stuff on hand for the reconstruction of the plant; sundry 
 other small items amounting to $12,463, making a total of 
 $82,076. Of course, if the Company needs to use, and should 
 use, one of these lots of land for an office building, it might then 
 be properly a part of the gas plant and treated as such for all 
 
48 
 
 purposes. In fact it does not so use this land, nor, on the evi- 
 dence before this Commission, would any new company think of 
 buying either of these business blocks as a part of a gas plant. 
 
 But Stone & Webster say that they paid over $600,000 for 
 this property, and the Commission admitted this evidence as 
 having some tendency to show what the property might be worth. 
 No court would ever have admitted it. It was not a sale within 
 the meaning of the sensible rule that sales in the open market 
 are competent to show values. 
 
 But, passing this weighty objection, it does not even appear 
 that Stone & Webster had any valuation of the property made 
 by engineers before they made the purchase. Mr. Eobb's testi- 
 mony seems, indeed, to show that they did not rely at all upon 
 an engineer's estimate in making the purchase. Nor does it 
 appear that there was not some ulterior purpose, financial deal- 
 ings perhaps connected with the settlement of the bankrupt es- 
 tate of E. H. Gay & Co. (like the Hudson Kiver Power Com- 
 pany) inducing them to make this purchase. But another and 
 perhaps more important motive, which may explain the payment 
 of this extraordinary price, is the fact that the City of Haverhill 
 had started to take this plant for a municipal plant. Now, if 
 there is anything that a concern like Stone & Webster, who are 
 now engaged in exploiting at tremendous profit to themselves 
 public-utility plants all over the country, do not want, it is mu- 
 nicipal ownership. To stop a movement of that kind in Massa- 
 chusetts cities may well be worth several hundreds of thousands 
 of dollars to them. Moreover, their whole attitude in this case, 
 particularly again Mr. Eobb's testimony, shows that what they 
 really paid for was not plant, but franchise. They were ready 
 to pay a big price because of their belief, unfortunately too well- 
 grounded in historical fact, that under the regulation hitherto 
 administered in this Commonwealth, gas consumers could and 
 would be compelled to pay prices which would give a return on far 
 more than the fair re-productive value of the property used and 
 necessary to be used. This Commission can have no doubt that 
 $600,000 was from two to three times the fair re-productive value 
 of this plant, when Stone & Webster bought not really the 
 plant at all but the stocks and bonds of the Haverhill Gas 
 Securities Company. 
 
 It would be a strange proceeding if this Commission should 
 allow its judgment as to the value of gas properties to be influ- 
 
43 
 
 enced by the price paid for a control of gas property, based in 
 large part upon the Commission's failure hitherto to make effec- 
 tive reasonable and just prices for gas. 
 
 IV. 
 
 REGULATED MONOPOLY AND MUNICIPAL OWNEK- 
 
 SHIP. 
 
 Legalized monopoly under the regulation of this Commission 
 is really in competition with municipal ownership. Bad as our 
 municipal ownership law is and I may note in passing that the 
 law was drawn, not for the purpose of facilitating, but of pre- 
 venting municipal ownership, this Commission cannot expect 
 to command in the long run general public support unless, fairly 
 compared, the results of legalized monopoly under its regulating 
 control, are as good service at as low rates as may be reasonably 
 expected under municipal ownership. 
 
 Just what the gas consumers of Haverhill would have had 
 under municipal ownership is, of course to some degree, specula- 
 tive, but not too speculative to make interesting and pertinent 
 a comparison between what they have had and what they might 
 have had if they had taken this plant over in 1886, when Massa- 
 chusetts created this regulating Commission. The comparison, 
 in brief, is as follows : 
 
 The amounts paid by the Haverhill Gas Company to or for 
 the benefit of its owners are as follows : 
 1886-1896, dividends 10% per annum, 11 years... $82,500.00 
 
 1897, 14% 9,750.00 
 
 1898, " 50% 37,500.00 
 
 1899, 20% 15,000.00 
 
 1900, 30% 22,500.00 
 1901-1910 Payments to Haverhill Gas Securities Co. 249,373.86 
 
 Making a total of $416,623.86 
 
 This is an average dividend for 25 years of about 22 1-5%. 
 
 But this is not all the sums that these gas consumers have been 
 compelled to pay in their gas prices, on capital account. (And 
 note in this connection that, on any theory of the surplus fund, 
 it cannot be repaid in cash to gas consumers ; the most that can 
 be claimed for it is that in equity it is to be held for the benefit 
 
44 
 
 of both consumers and stockholders, or so applied as to give 
 greatly reduced prices.) The consumers have also contributed to 
 a depreciation or surplus fund. In 1887 the total assets of the 
 Company, according to its books, were $91,878.07. In 1910, the 
 total book assets, deducting the worthless claim against the Hav- 
 erhill Gas Securities Company, not an asset at all, were $764,- 
 871.99, or $672,993.92 more than they were 24 years ago. The 
 Company, therefore, claims that in these 24 years it has in- 
 creased its assets out of net earnings about $28,000 a year. But, 
 as already shown, this result is reached by the process of padding 
 for the purpose of stock- watering ; the actual increase is nothing 
 like $28,000 a year. A fair estimate of the increase of the prop- 
 erty out of excess earnings during these 25 years is $10,000 a 
 year, amounting to $250,000 in the 25 years. As the Eeports 
 of this Board do not show a return of the assets of the company 
 until 1887, the increase figure is really for 24 years and not for 
 25 a slight error in favor of the Company but practically 
 immaterial. This estimate of $250,000 increase is substantially 
 less than the increase shown by the assessors' valuation in the 
 City of Haverhill, for during the same period they have in- 
 creased the assessed valuation from $122,500 to $439,525, an in- 
 crease of $317,025. 
 
 Another method of testing this estimate is by taking the 
 aggregate of the balances of the Gas Manufacturing Account for 
 
 24 years, which is $902,923.17, and deducting the amounts paid 
 in direct and indirect dividends as above set forth for the same 
 period of 24 years, which is $416,623.86, which leaves something 
 over $486,000 as money apparently earned and not paid out to 
 stockholders. If we allow something over one-half of this for 
 repairs and depreciation not already charged up in operating 
 expenses, we must be up to the facts, even taking into account 
 the fact that this manufacturing plant has been junked twice; 
 and that it has had (what Stone & Webster say by their acts), 
 bad engineering in putting in the plant they have taken out, and 
 what Mr. Adams says is bad engineering in putting in the plant 
 that they have just put in. 
 
 Taking this $10,000 a year as the consumers' excess contribu- 
 tion, and adding this to the dividends actually paid, we have a 
 total contribution to capital made by these gas consumers of 
 $666,623.86 for the whole period, or $26,664.95 a year for these 
 
 25 years, an average of 35.5% on the $75,000 of capital. 
 
45 
 
 Assuming, on the other side, that the City of Haverhill had 
 taken this gas plant in 1886 or 1887, when its book value was 
 a little over $90,000, and its value assessed for taxes was $122,- 
 500, what would the City have had to pay for the plant? Its 
 book values would have been evidence against it. Assessed value 
 for taxation purposes gives us a basis for fair inference. ' One 
 hundred and fifty thousand dollars, or twice its capitalization, is, 
 in my judgment a high price to estimate that the City would 
 have had to pay for this property in 1886. I do not concede that 
 the plant was worth $150,000 in 1886, or that the City ought 
 to have been required to pay substantially more than one-half of 
 that sum. But I am assuming that, as usual in Massachusetts, 
 Haverhill would have had to pay a large premium for its free- 
 dom from the gas tax gatherer. I have resolved all doubts on 
 both sides of the account, in selecting figures, against municipal 
 ownership. The City could clearly have borrowed this money 
 at 5%, which would have made an annual carrying cost of 
 $7,500, which in 25 years amounts to $187,500. 
 
 Actual payments under private ownership to capital 
 
 ($75,000) during the 25 years $666,623.86 
 
 Estimated payments under municipal ownership for 
 
 the same period 187,500.00 
 
 An advantage from municipal ownership of $479,123.86 
 
 for 25 years, an average of $19,164.95 a year. 
 
 Municipal ownership costs per annum $7,500.00 
 
 Private ownership costs per annum 26,664.95 
 
 or more than 31/0 times as much. 
 
 Nor can anything be conceded to the common claim of superior 
 efficiency of management under private ownership. During the 
 years 1886 to 1898 inclusive the management was probably good; 
 I remember getting a good impression of the competency and 
 faithfulness of Mr. Stratton, the old Superintendent. But since 
 the speculators got control in 1899, the management has been far 
 more inefficient than even a very badly managed municipal 
 department. 
 
 If the City of Haverhill as a municipality could have had 
 the benefit of the taxation (for it is such) levied upon its citizens 
 by its Gas Company, it would have gone far to defray the ex- 
 
46 
 
 penses of the school houses necessary in this thriving and intelli- 
 gent community. 
 
 These results of legalized monopoly are typical except as to 
 degree. We must .have municipal ownership: our "regulation" 
 has given us piracy. 
 
r 
 
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