REPORT OF THE FEDERAL ELECTRIC RAILWAYS COMMISSION TO THE PRESIDENT AUGUST, 1920 ■^^ WASHINGTON GOVERNMENT PRINTING OFFICB 1920 :^ REPORT OF THE FEDERAL ELECTRIC RAILWAYS COMMISSION TO THE PRESIDENT V AUGUST, 1920 WASHINGTON COVEnNMKNT I'lUNTlNG OFFICE 1920 rhM^^' SRLi ^- URL KEPORT OF THE FEDERAL ELECTRIC RAILWAYS COMMISSION. The President of the United States. Sir: Tlio Fedoral Electric Railways Commission begs leave to present the following report. Tliis Commission was appointed by you in response to a suggestion outlining the need of such a commission in tlie following letter from two members of your Cabinet, the Secretary of Commerce and the Secretary of Labor: Washington, D. C, May 15, 1919. Dear Mr. President: The electric-railway problem to which your attention has been called on several occasions has recently assumed such serious national propor- tions as to warrant the prompt attention of the Federal Government. Already 50 or more urban systems, representing a considerable percentage of the tly also a factor in the situation, but whatever may be the cause, tlie facts seem pretty clear that the demand for trans- portation service is still growing apace. This fact, I think, i;' generally not under- stood ; in fact, I am free to confe^e that we ourselves were surprised to see the extent of tlie increased demand for service. In 1917 the number of employees was 294,826, and it is estimated that the total number of people who were directly and conveniently accessible to electric railway service is about 80,000,000 at the present time. The electric railways have overllowed municipal boundaries and now include a network of interui'ban lines in many portions of the comitry, bu* the fact still remains that the iiulusUy is primarily a street railway, with its principal function the transportation of passengers within the limits of municipalities. vTliife the electric railway industry is essentially local, it has cer- tain national characteristics. Its dilliculties can not be regarded simply as the isolated problem of a local system repeated hundreds PROCEEDINGS OF FEDERAL ELECTRIC RAILWAYS COMMISSION. 7 of times all ovor the ooiintry in varied forms and degrees, each problem being in(l(^|)endent of all the others. On tlie contrary, although a local traction svstem may be separated by hundreds of miles from its nearest neighbor, it is in other ways insej)arably con- nected with all of the others. As a purchaser" in the equipment markets of other vStates it competes with other companies. Its demands for labor and its scales of wages are necessarily felt at once by traction s)^stcms cverpvhere. In procuring its ca])ital its ofhcers have been generally compelled to market its securities to a large extent in other States, among investors who are particularly inter- ested in such classes of investment, 'fhc close industrial and finan- cial interdependence of the hundreds of phvsically unrelated local traction systems, the millions of dollars of capital placed by thousands of investors in plants which manufacture electric traction equipment, and the five biUions of electric traction bonds and stocks to be found scattered all over the country in banks, insurance company reserves, and in private investment, translate the many local problems into a national problem. Section III. FINANCIAL CONDITION OF THE ELECTRIC RAILWAY INDUSTRY. The investigation demonstrates that the financial condition of the electric railway industry is acute, and that to a very great extent it is not properly performing its public functions. The record in this case shows that on May 31, 1919, there were 62 companies, having a mileage of 5,912, in receivership, that 60 com- panies had dismantled and junked altogether 534 miles of railwav, and that 38 companies together had abandoned 257 miles of track. Since that date and up to f'Uly 1 , 1920, th^re have been 56 additional companies, having a mileage of 1,908, which have been thrown into receivership. The capitalization of the industrv, according to the 1917 census report, is represented by §3,058,377,167 in bonds and S2, 473,846,651 of stock. For the year 1917 the net income of operating companies was 856,450,930, representing an average rate of return of 2.81 per cent upon the capital stock. In 1918 the evidence shows the net income was reduced tx) P20, 183,413, which represents a return of only 1 per cent. As a whole, there has been some improvement in the industry since the commencement of these hearings, due to the fact that there has been an increase in the car-riding habit since demobilization, and in a great many instances the fare has been increased beyond 5 cents. In spite of this slight imjjrovement, however, the condition of the industry at the present time is serious. A great many companies are miable properly to maintain their track and equipment and to perform efficient public service, to secure funds with which to purchase new equipment, to build necessary improvements and extensions, or to refund maturing obligations. A large number of factore have contributed to the present plight of the electric railway industry. Thes(^ may be mentioned: (a) They were not conservatively financed in their early years, and have not since made good their overcapitalization, except to a limited extent, otherwise than through the process of bankruptcy and reorganization. In the early days the promoters of electric- 10972°— 20 2 8 PROCEEDINGS OF FEDERAL ELECTRIC RAILWAYS COMMISSION. railway properties believed that long-term franchises with a 5-cent fare would be permanently profitable. Large sums of money were required to develop the- business. In many cases the promoters issued bonus stock to represent their hopes and expectations. This bonus stock did not represent money, service, or propcrt}^ and added nothing to the value of the plant. As a result of tliis practice, there are many cases where the existing capitalization exceeds the invest- ment in the plant or the value thereof. (b) Neglect to amortize tliis excess capitalization. (c) Failure to amortize the normal accrued depreciation. (d) Payment of unearned dividends and neglect of ordinary main- tenance. • (e) Overbuilding into unprofitable territory or to promote real- estate enterprises, involved sometimes -with political improprieties. if) A uniform 5-cent fare, which established a constant rate to apply during variable cost periods. This contract fare has been a source of irritation, resulting in litigation. Diu-ing normal times many communities sought to have the fare reduced below the con- tract price. The companies insisted upon adliering to the contract, and they were sustained by the courts. During tlio recent high-cost period many companies have applied for an increase in fare to enable them to meet operating expenses and fixed charges. In many cases communities undertook to prevent the increase beyond the contract rate. Under the decisions of the Supreme Court of the United States and of the highest courts of a number of States, it is now established that a francmse provision naming a certain rate of fare creates no vested riglit of any car rider but that such fare can be properly changed by appropriate legislation and substituted by a higher charge. As indicative of the fact that the 5-cent fare has not been adequate during the war period, we need only to call attention to the fact that on July 1, 1920, increased fares have been allowed in over .500 selected cities; 10-cent fares have been allowed in 69; 9-cent fares in two cities; 8-cent in 30 cities ; 7-cent with 1-cent charge for transfers in 26 cities ; 7-cent zones in 6 cities; 7-cent in 145 cities; 6-cent zones, with 2-cent transfer charge, in 10 cities; 6-cent for two zones, with 2-cent per zone thereafter, in 13 cities; 6 cents for each two zones in 4 cities; 6 cents cash fare in some cases in 149 cities; 5-cent zones and elimination of reduced rate ticket in 50 cities. Boston has a 10-cent fare. Chicago, Washington, Cincinnati, Kansas City, Youngstown, and other large cities are on an 8-cent basis. It would seem that so long as the railways depend upon earning power, and earning power depends upon passenger revenue, the fixed unilorm fare is a broken reed for the industry or for the community to lean upon. Perhaps the general sentiment of the electric railways is best expressed by the evidence of Gen. Guy Tripp before this Com- mission, as follows: We were all living in a fool's paradise in the street railway business when we sud- denly woke up— wlien the war woke us up— to find that no ])usine33 which can not increase its revenues under any conditions can live or is sound. Conversely, it may be said that no community shoidd bind itself by contract or otherwise to continue, after normal conditions have been restored, a rate which might be found reasonable during this abnormal period. PROCEEDINGS OF FEDERAL ELECTRIC RAILWAYS COMMISSION. 9 iq) Limited franchises which impair credit and toward tlie expi- ration of the franchise residt in neglect of the maintenance of the property. Oi) Special taxation and franchise ohligations, having particular r(5ference to street paving, street sprinkling, construction and main- tenance of hridges used by the general public, general taxation, etc. The American Electric Railway Association introduced a chart which showed that the total amount of taxes levied against the properties in 1917 amounted to S45, 756,695, of which taxes on real and personal property was $21,804,619, and on earnings, capital, and other taxes 823,952,076, representing 10.11 per cent ojf the operating expenses. In 1902 the ratio of taxes to operating expenses was 9.19 per cent. It is thus seen that there is only a small increase in the ratio of expense for this item since last year. For the period from 1913 to 1918 the expenditures for all taxes, including paving and other imposts, has ranged, from ■S60,000,000 to $65,000,000, coiTcsponding to 10 per cent of the operating revenues. The ratio varies very materially among the different plants. The evidence on behalf of the companies therefore shows that on the basis of the 5-cent fare the taxes represent about one-half of a cent in the nickel which the car rider nas been paying, and that they thus contribute materially to the necessity for fare increases. The argument has been made with considerable force that the car rider should not be required to pay for supporting the city's schools, its almshouses and other city institutions. It is contended that the company should be required to pay in taxes to the city only such an amount as would reimburse the city for its actual cost due to the presence of the street railway; and that such a plan of taxation alone would be consistent with the idea that the car fare should be based upon the real cost of rendering the actual service of transporta- tion. Although there is much force in this idea, and it should be borne in mind V)y all who are interested in street railway problems, we do not think the time is ripe for recommending its general adoption. The heavy taxation to which the companies are now subject came into being during the period of their prosperity and at a time when they were still essentially private concerns, relatively free from regulation. It was natural that their properties should be taxed in no less degree than the properties of other private corporations. AVlien a company comes to subject itself to such a comprehensive regulation as renders its property in effect a public instrumentality, then tax exemption begins to be in order. This couree has indeed been followed in Cleveland, where as an incident to the passing of the properties under the Tayler plan of municipal reguhition they came to be exempted in large measure from taxation. To the extent that it may become possible in any community under similar conditions to exempt street railway property from taxation, the rider's car fare will come more nearly to represent the actual cost of rendering the service of transportation — in itself a desirable result. But it would seem that the status of the company as a public agency should be well assured before such exemption sh9uld be attempted. 10 PROCEEDINGS OF FEDERAL ELECTRIC RAILWAYS COMMISSIOIT. (i) Automobile and jitney competition. — For several yeai-s prior to the war, and to an increasing extent throughout the war period and up to the present time, the automobile has proven to be a serious competitor of the electric railways rendering local transportation service. Jitneys and automobile buses operating as common carriers have been able in some cases, through the absence of sufli- cient public regulation, to engage in unfair and destructive competi- tion with the electric railways for the most profitable part of urban passenger trafTic. vStrong as this competition has been, however, the electric railway industry as a whole has shown a very substantial increase in the riding habit. The operation of jitney buses as com- mon carriers is much more restricted than the operation of private automobiles, but the jitneys have had a definite and intensive effect upon the street railway situation in particular communities, for the reason that they have engaged in direct and in some respects destruc- tive competition with the street cars as public carriers. The experi- ence of numerous communities, even before the extraordinary conditions growing out of the war, made it clear that unrestricted jitney operation, though more or less temporary and precarious in character, threatens the service, credit and solvency of the street railways. ( j ) Tlolding companies and hanlier control. — About 75 per cent of the public utilities of the comitry are held, m whole or in part, by so-called "holding companies," which are responsible for their oper- ation. Tills fhiancing is done m large part through the securities of the parent company, which securities are supported by the securities of the various operating companies. This frequently gives an ele- ment of strength to the securities of the parent company which a smgle localized operating company could not in all cases present. If it were not for the supporting strength of these parent 'companies, many of the individual operathig companies would have gone under before January 1, 1918. Through these hoidhig companies the electric raihvays threaten to become a banker-controlled industry. Those who have the ultimate say in matters of street railway policy from the point of view of investors have been dependent for their profits and their power upon the volume of secm-ities outstanding and the frequency with which these securities have been exchanged or refunded. Holding com- panies in many instances have been responsible for overca])italiza- tion and have insisted upon drawing from the underlying companies every possible cent that could be secured in order to nuike a showing on these inflated securities. ~Hon. Joseph B. Eastman, at present a member of the Interstate Commerce Commission, discussed the question as follows: Jn the third place a factor of weakness, I thinjc, was the control of the companies in many instances by holding companies organized in the form of voluntary associa- tions, or, to u^e a more technical term, express trusts. Although the stock and bonds of the street railway companies themselves were issued under pulilic supervision, thede voluntary associations whicli corralled all tlieir stock were subject to no regula- tion whatever and issued shares upon an inllated basis, and tliat had the result of accentuating the desire to draw every possible drop of income out of thd underlying companies that could be secured, in order to support earnings upon the inflated shares of thtse voluntary associations. Through this sj'-stem of financing and management the utilities have been largely controlled b}^ persons living distant from the PROCEEDINGS OF FEDERAL ELECTRIC RAILWAYS COMMISSION. 11 commiiuity alTcctod l)y a particular electric railway, whose prime consideration has been to s'ecure a return upon the pr()])erty. This "absentee" management and control has not been successful in bringine; about the i)r()per spirit of cooperation between the local managers, employees, and the public. Since the electric railway companies come into immediate daily contact with hirge numbers of people, it is of the utmost importance that the industry should gain and hold the respect, confidence, and good will of its patrons. If the local public should invest its money in the stock and bonds of its local utilities there would be an improvement in the relations now existing between the corporation and the public. (li) Use of regulatory power to compel more and hctt/'r service. — Through the exercise of this power the companies have been required in many instances to improve their standards of service and equip- ment; to equip cars with vestibules for the- protection of the motor- men; and to give better heating, lighting, and ventilation for the comfort and convenience of the passengers. Tliey have also been obliged to install safety devices and make stops at frequent intervals. The exercise of the regulatory i)ower of States and municipalities has undoubtedly added to the cost of the service. (I) Underlying companies and leased lines. — CoiLsolidalions have been brought about tlirough the unification of a number of separate corporations which owned and maintained lines of track witliui the same city. In many cases consolidations were made upon the con- dition that these companies should be guaranteed a certain rate of return or fixed sum, which represented a high percentage yield upon the investment. The returns thus secured have been a frequent source of irritation, induced by a feeling that these underlying companies are being paid more than a reasonable return upon the value of their property. Your Commission believes that excessive payments to the underlying companies by the operatmg company have greatly diminished the net operating revenue, and that there can be no satisfactory solution of the street railway problem in such communities until the system has been valued as a whole, and the accounts so kept that the public may laiow that the rate of fare paid yields no more than fair return upon the value of such property. {in) Increasing demands of labor. — The wages of street-railway labor prior to the war were generally insufficient from the view]ioint of a living wage, and the increases in wages that have taken place since the beginning of the war period have not on the average been as great as the increase in the cost of living. At the time of our entry into the war, the average wages of motor- men and conductors for companies of 100 miles and over were ap- proximately 31.5 cents per hour. Since the war there has been a rapid increase in the wages of employees. The National ^Var Labor Board by its awards in the year 1916 established the normal wages for this class of service in different cities, varying from 38 to 48 cents per hour, increasing wr.ges 23 i per cent. The awards of the board mark the beginning of the rapidly increasing wages in this class of employment. An exhibit filed by the Amalgamated Association of Street and Electric Railway Employees of America shows the wages for conductors in the ])rincipal cities of the Ignited States and Canada as of January 1, 1920. For convenience the exhibit is published as an exhibit attached to this report. 12 PEOCEEDINGS OF FEDEPuAL ELECTRIC RAILWAYS COMMISSION. Since that date, new contracts have been agreed to which sub- stantially increase the wages in a numbet of cities. (n) The war and the dollar. — The conditions which hare been here enumerated tended to break down the credit and stability of the electric-railwa}^ industry. The increases in prices of labor and materials entering into the construction, maintenance, and operation of electric railways during the war period have corresponded with the increases in the prices of general commodities and in the wages of labor in all industries. Operating costs became so high that in many cases the revenues were not sufficient to pa}' even the current expenses of operation. Material and etpiipment prices reached abnormal heights. The increase over 1915 in railway motors and car equipment show 87 per cent; locomotives, 87 per cent; rotary converters, 75 per cent; transformers, 70 per cent; switchboarils, 100 per cent; motor generator sets 95 per cent; turbines, 100 per cent; pig iron, 106 per cent; steel plates, 141 per cent; copper, 58 per cent; steel castings, 220 per cent; coke, 35 per cent; coal, approxi- mately, 100 per cent; asbestos material (which is largely used), 560 per cent; other insulating materials, 125 per cent; magnetic sheet steel, 280 per cent; labor from 85 per cent to 90 per cent. (o) Cost of new raoney. — The destruction of caT)ital incident to the World War and the unpreceilented demand of the Government and industries for money, resulted in largely increasing the interest rate for loans. More attractive loans are now absorbing monej' available for investment, leaving the electric railways v/here, even with credit restored, they would have to compete in the money market with prosperous and unregulated enterprises. These factors, and more particularly the increase in wages, fuel, material, and supplies, during and since the war period, have brought the electric railway industry to the point v* here in many instances it may be forced to abandon public service, and, in most cases, to a point where it v.ill be unable to sccm'e new ca])ital to enable it to refund maturing obligations, secure new ec^uipment, and to make necessary extensions and improvements unless some solution of the situation can be found. Section IV. EMERGENCY RELIEF. The evidence in this case shows that the State regulating commis- sion and in a large number of cases the local tribunals have recog- nized that it has been necessary to grant emergency relief to secure to the communitiies the service of the electric railways. With commendable initiative and ofttimcs against a hostile pub- lic sentiment, the regulating officers have granted temporary increases in the fares v.ithout undertaking to determine the value of the plants or make a long and exhaustive investigation. Very little, if any, criticism was made to us against State regulating com- missions for their treatment of these utilities during the war period. The most serious difficulties were met with in communities where the charge was fixed by franchises, and the State authorities wore without jurisdiction to regulate fares. During a war or other abnor- mal i)eriods it would seem to be the duty of the State and numicipal PROCEEDINGS OF FEDERAL ELECTRIC RAILWAYS COMMISSION. 13 offic(Ts. to deal promptly with petitions for increased fares and to afYord such relief as will enable the street railway to serve the public and maintain its track and equipment in proper operating condition. The public always ^^ays for a run-down plant, either throu<2;h inferior service or higher charp:es. The first essential is service to the public. Due recognition of this fact will secure to the investor a safe return upon his investment and to the public uninterrupted operation. Sectiox V. CREDIT AND COOPERATION ARE THE COORDINATE NEEDS OF THE ELECTRIC RAILWAY. It is clear from this record that the two serious needs in the electric railway situation to-day are its need of credit and its need of coop- eration between the public and the utility. Credit v^ill enable the electric railways to rehabilitate themselves, to adjust their capital accounts, and to meet the prices of normal replacements which are now upon higher price levels. The coopera- tion of labor v;ill enable them to render continuous and popular service, to effect operating economies, and to get into their treasuries the full amount of revenue collected from the riding public. First- class credit and the full cooperation of their employees, if properly utilized in rendering adeciuate public service, would give the electric railways a well-nigh impregnable position in their relations to the public and tend to disarm and overcome the prevailing antagonism against them. With capital and labor performing their respective parts freely and well, restrictive regulation would be unpopular, and the demand for the substitution of public ownership and operation for private management would shrink into^ relative insignificance. The test of private ownership and managenient lies in the solution of these two problems of credit and cooperation. These problems must be solved, and if no solution is practicable under present owner- ship and control, then the only course open is the complete transfor- mation of the electric railway industiy into a governmental business. Each member of this Commission believes that credit can be secured and private operation maintained under public supervision. Unless the confidence of the investor in the securities of the com- panies furnishing this essential public service be restored the public itself must in some way assume the burden of supplying the funds necessary for their continuance. To a degree unknown to private business enter]>rises, which to a certain extent are able to finance capital expenditures from earnings, the electric railways are depend- ent upon new investment — new capital — for the extension, improve- ment, and betterment of the service which they perform. Commu- nities need and are constantly demanding additional local trans])or- tation facilities. They require large sums of money, which can only come from those with savings to invest. Wlien the flow of new capital ceases, when the confidence of the investor in the ability of the enterprise to safeguard the integrity of the investment and to insure a fair return thereon ceases, new capital is unobtainable and the utility can no longer serve the purpose for which it was created. This condition is now present. Lack of confidence in electric railway investment exists to-day to a degree which has caused a 14 PROCEEDINGS OF EEDERAL. ELECTEIC RAILWAYS COMMISSION. partial paralysis, is worldng havoc with the finances of the companies, and is depriving the public of the service to an alarming extent. For rehabihtation and improvements and extensions which are vitally needed to meet the requirements of every gro-sring commu- nity new capital at once and in large amounts is imperatively required, and until the force of circumstances convinces those with ca])ital at their disposal that investment in electric railway securi- ties affords safety and a fair return it can not be obtained. So far as the requirements in norm.al times are concerned, certain characteristics of the electric railways and certain conditions under which they operate tend to make their credit almost unlimited. In the first place, they have enjoyed a monopoly of the most convenient form of local transportation dm-ing a period of rapid industrial development and of rapid increase in urban population. They have a continuous and imanediate market for their "goods." They seU transportation as it is produced. Wliile electric railway traffic fluctuates somevrhat from year to year, according to the number of passengers and the prosperity that preA^afe, and fluctuates somewhat from season to season, from week to week, and from day to day, these fluctuations are relatively unimportant. The business of trans- portation goes on every day in the year. Under normal conditions the credit of the electric-railway business is its relative!}^ small need for ''fluid" or worldng capital. In this respect it occupies a position more independent than that of any other utijity or any other private industry. It does a cash business. Almost 100 per cent of its reve- nues are collected in advance, through the sale of tickets or at tlie time the service is rendered, from the collection of fares in the cars. Money flows into its coiTci's day by day in a relatively even stream. Before it pays the vrages of its employees, the salaries of its officere, the claims resulting from injuries and damages, the rentals for the use of property, the interest and dividends on its investment, or its taxes, it has already collected from its patrons in cash full compensation for the service rendered. It does not send out hUls. The increase in revenues of the electric raihvays is a product of three lines of expansion. These arc the increase in luban population, the increase in the riding habit, and the increase in tlie rate of fare. The gross operating revenues of the electric i-ailways grew from S247,000,000 in 1902 into $630,000,000 in 1917— an increase of 163 per cent. For a number of yeai-s, particularly during the first decade of the century, there was a strong tendency toward fare reductions in many urban communities, but the evidence shows that for the coun- try at large the total amount of electric raihvay operating revenues increased by a much greater per cent than the number of revenue passengers during the 15 yeare ended with 1917. Since the latter date there has been a strong upward tendency in street railway fares. Statistics covering 75 per cent of the electric railway trafiic of the country indicate an increase of nearly 14 per cent in the average fare paid from 1917 to 1919, and an increase of about 22 per cent in passenger earnings during this two-year period. Without a doul)t the enjo>anent hy the clecti-ic-railway industry of a steady inflow of revenue of rapidly increasing]; volume, assured hy the most fundamental conditions of modern life and the strongly developed habits of the people, is extremely faAorable to credit. In what other industry could investment be made with greater assm-ance PROCEEDINGS OF FEDERAL ELECTRIC RAILWAYS COMMISSION. 15 of security and continued earning power? Tlio tracks for tlic most part are in the public streets where everyhody can sec^ them. Tlio operation of the cars is most conspicuous. It would b(^ hai-d to find another industry where the investment is completely visible to all and so freely observed by the entire population. If publicity of operation is a guaranty agamst the waste and disappearance of capital, then the position of the electric railway, where everybody can observe it every day, is surely conducive to the development and retention of credit. From this viewpoint how differoit is a street-railway investment from an investment in mining stock or in tiie fruit lands of the far West, or even in manufacturing enterprises in one's homo city? The capital stock of electric railways does not require to bo refunded, and mider sound financial and regulating policies the pro- portion of stocks to bonds outstanding woiud undoubtedl}' be niuch greater than is shown to have been the case. Under such conditions refunding difficulties would be about negligible. The record is not clear as to the amount of new money which may be required year by year, but a vcrv conservative estimate places the figures at between $175,000,000 and $200,000,000 per annum, to be used in replacements, rcfundiiig obligations, extensions, and improve- ments. For the purpose of restoring credit, it seems to be the general impression of all witnesses that the first necessity is for the industry to put into effect such economies of operation as will enable it to give good service at the lowest cost. Generally speaking, tliis can be done by the elimination of deadheads and other free service, the abandonnrient of nonprofitable lines, and, where practicable, the substitution of one-man cars for heavier equipment, the modification of special taxes or provisions for paving, snow removal, street closing, tolls, contributions toward the cost of public highw^ays, bridges, etc., reduction of such rentals and power rates as may on investigation prove excessive, the cooperation with the public in develo]ung faster schedules and installing skip stops at convenient places, rerouting of cars, the use of trailer cars, keeping street car tracks clear of traffic and other congestion, due to parking of motor cars on curbs, and the regulation of vehicular traflic. Much can also be done toward reduction in the cost of operation by developing the proper spirit of cooperation with emplo3-ees. All of the matters herein suggested properly come under the head of good management and regulation and in some cases w^ould entail legislation, but in our judgment they do not wholly solve the street car problem, or invite needed capital into the i?ulus(.iy. During the past two years efl'orts have been made to meet the difliculty by increasing fares. In many cases this has helped to tide them over a difficult period, but it has not stimulated the confidence of the investor in the integrity of the industry. New capital is not flowing- in that direction. An effort has also been made in a number of communities to increase the short-haul riding habit as well as the revenues by the introduction of the zone system for fares. This system has proven generally successful in some of the European countries, but it has met with varying success in the United States. Fundamentally the theory of the zone system is logical. It is that a passenger pays for what he gets. Under the present flat fare charge, the short-haul rider is paying for a service given to the long-haul rider. 16 PROCEEDINGS OF FEDEEAL ELECTRIC RAILWAYS COMMISSION. The original failure of the electric railways to vary their rates of fare for transportation service, based upon the length of the ride, as services in all other lines of business are sold, is, in our judgment, one of the contributing factors to their present financial condition. The electric-railway industry is the only public utility which, as an industry, has consistently adhered to a flat basis. Steam and suburban roads charge on a distance basis. Gas, power, electric, and water power companies, generally, make their rates upon a measured basis, subject to a minimum charge per month and the telephone company grade all toll messages on a mileage basis, while observing in most cases a flat rate per month for local service. Whether or not under present conditions it would be to the interest of a community to introduce a zone system of fares, instead of the present flat fare sj^stem, is a c[uestion which we think should be decided by the com- munity itself, having reference to the social problems involved. Section VI. LABOR ON STREET RAILWAYS. The labor policies of the electric street railways will in the future be of great importance as an element in the restoration and the perm.anent maintenance of their credit. The full cooperation of labor is essential to the liighest prosperity and usefulness of the industry. Tliis is particularly true because in the case of the street railways the employees who immediately handle the service come into direct contact with the i)eople who consume that service. The evidence before this Commission shows that in the past the suspension of service, due either to strikes or lockouts, has been costly to both the employees and to the operating company, but the loss occasioned to those two groups has been secondary to the damage wrought to the public interest. The conditions which recurrently bring about such interruptions of service should be treated at their roots. The employees engaged in- this occupation should have a living wage and humane hours of labor and working conditions. They should have the right to deal collectively with their employers through committees or representatives of their own selection. In all contracts and working agreements made betv/een them and the employing companies there should be arbitration {)rovisions under which all labor disputes which can not be voluntarily settled shall be submitted to ]:)oards of arbitration composed of disinterested persons. The award of such a board of arbitration should be final and binding upon both parties to the controversy; for it is intolerable that the ti'ansportation service of a city should bo subject to occa- sional paralysis, whether by strikes or by lockouts. It would seem that public authorities could well interest themselves in the formula- tion of such plans and rules for the arbitration of labor disputes under these contracts as will secure justice to both parties and as will assure continuitj^ of service in so far as that may be possible of achievement. But the full cooperation of labor in the street-railway industry will not have been brought about alone by the recogniti(m of the right of collective bargaining which we have just b(H'n urging. Such recog- nition is but a foundation for full cooperation. The actual work of insuring it must come from the employees themselves to whom the PROCEEDINGS OF FEDERAL, ELECTRIC RAILWAYS COMMISSION. 17 right of colloctivc bargaining is thus given. For that riglit carries with it a duty. It woukl seem to be the duty of tiie organization which bargains for the in(hvidual worker to interest itself actively and unremittingly in his delivering to the company his Ix'st strength and intelligence. This Commission thinks that where the street-railway worker has the right of collective bargaining the public litis the i-ight to exp(>ct that the organization or association repres(Miting him will not only procure his wage, but will also continuously stimulate his whole- hearted constructive cooperation with the company and his effective service to the public. Section VII. VALUATION. It is the law that utilities are entitled to a fair return upon the value of their property used in public service at the time of the inquiry. Tiie metnods for finding fair value arc in dispute. No permanent solution of the electric railway question can be found in the absence of a finding of value for rate-making purposes. This applies to commission form of regulation, cost-of-service contracts, or public ownership and operation. The public should knov/ what it is paying for, and this question can not be settled without knowing what the property is worth. Although some evidence was introduced before this Commission on the subject of valuation, the Commission discouraged the intro- duction of testim-ony upon this c^uestion mainly because such testi- mony, no matter over how many weeks or months it might bo extended, would have been but a fragmentary duplication of material already available in the official records of the Interstate Commerce Commission. Pursuant to an amendment of the Act to Regulate Commerce, approved March 1, 1913, which amendment is known as the Valuation Act, the InterstateCommerceCommission has during tl.o past seven years been engaged in valuing the steam railroads, tele- graph, and long-distance telephone companies in the United States. In connection with this work it has carried on a most extensive investigation into the subject of valuation for rate-making pur[)()ses, in the course of which investigation the carriera have been represented by a conference committee of 50, assisted by able lawyers, account- ants, and engineers, while the public has been represented by the State public utility commissioners, their counsel, and l)y the General Counsel of the Interstate Commerce Commission. Every theorv and principle of valuation has been fully and ably discussed, argued, and briefed. On July 31, 1918, the Interstate Commerce Commis^uon submitted its report in Valuation Docket No. 2, Texas Midland Jiailway. This report contains a full discussion of the different theories of valuation considered, the method employed bv the Commission in assembling all the essential data, and discussion of the requirements of the Valuation Act, and the findings of the Commission upon most of the disputed questions. Subsec[uent decisions were made in the case of the Winston-Salem Southbound, Alabama, Birmingham & Atlantic, and Kansas City Southern llailroads. We are informed that deci- sions aft'ecting many of the other railroads "will be made during the present year. 18 TEOCEEDINGS OF FEDEllAL ELECTEIC RAILWAYS COMMISSION. The first requirement of the Vahiation Act is for finding of original cost. The Commission is reporting original cost as fully as it possibly can be obtained from the best availa1:>le evidence in each particular case. In its vahiation proceedings it has been earnestly contended that the cost of reproduction new as of the date of inquir}' should be taken to be the value of tlic property. Others have contended with equal earnestness that the value of the property should be limited to the original cost, as this item represents the money which has been actually invested by the stockholders and bondholders in the property. The rapid increase in the cost of labor, supplies, and material during and subsec[uent to the war period seems to have served as a peculiarly vivid indication that the original cost is a primary factor in finding value for rate-making purposes. In our opinion, the decisions of the Interstate Commerce Commis- sion, based upon long experience and investigation, will in large measure settle the standards of valuation. For this reason we suggest that municipalities and States which may be engaged, by arbitration or otherwise, in fixing the values of electric railways, should familiar- ize themselves with the practice, experience, and decisions of the Interstate Commerce Commission in these valuation cases. The valuation, when once fixed as the basis for the financial return of the company, should logically come to affect the amount of capitali- zation. No matter what may be the plan of operation or of public regulation under which the company is working, if its financial credit is to be strengthened through just and stable arrangements with a friendly public, it should, in the judgment of this Commission, voluntarily reduce any excessive capitalization to conform to such valuation as may have been determined upon. Section VIII. PRESERVATION OF RECORDS. We would particularly urge public officials and officers of the electric railways to cooperate seriously in the protection and preser- vation of all corporate, financial, and cost records. Service-at-cost plans have been recentl}^ rejected by popular vote, largely on the issue of valuation, in Chicago, Denver, and Minne- apolis. The public, justly or unjustly, has become so suspicious of the electric-railway companies that it may be expected to reject any service-at-cost or public ownership question submitted to pop- ular vote, no matter how fairly the plan may be formulated, if it is not thoroughly convinced that the capital item has been fairly and honestly arrived at. The failure of a company to preserve its record may in the end hurt its stockholders more than it may the pul)lic. Section IX. AUT0!\[0B1LE, JITNEY, AND MOTOR BUS. The automobile and jitney bus are facts. Jitney competition began about 1912, and was at first entirely unregulated. Even to- day in some places it continues without regulation of any kind, and in many places with only partial and inefficient regulation. In no instance, so far as tliis record shows, has this so-called jitney carriage of passengers been subjected to obligations as to the payment PROCEEDINGS OF FEDERAL ELECTRIC RAILWAYS COMMISSION". 19 of taxes, maintenance of highways, character and extent of service, and financial rcsponsi])ility for accidents under which tlie electric railway ])nsiness is being conducted. The portion of the street paved and maintained t)y the electric raihvay, and in winter cleared oi snow ax its own expense, is tak(ni advanlttge of l)y the jitney competitor without compensation either to the company or to the munici- pality, and often to the sci'ious injury of the street railway by inter- lering with the prompt and regular movements of its cars. Tho jitneys prefer to confine themselves almost exclusively to the short- haul trafhc. It appears that in tlie city of Bridgeport the jitneys carry about 50 per cent of the passengers riding within 1\ miles of the center of the city; almost 69 per cent of the passengers riding between 1^ and 2 miles from the center; a fraction less than 45 per cent of tho.se riding between 2 and 2if miles from the center; and none riding more than 2J miles from the center of the city. Tiie ffaestion from the point of view of the street-railway service is, What, if anything, is to be done about them ? The public, through its governmental agencies, would not concern itself witli the effects of tliis c()m])etition if it were not that local trans])ortation is recog- nized to be an essential public service. So far as private automobiles are concerned, although they undoubtedly have tlieir effect upon the extent to which people make use of the street cars, they are even now less important tlian human legs as competitors of the electric railways, and it is not deemed to be consonant with the theory of American institutions and government that the free movement of private citizens by their own means of locomotion shoidd be re- stricted in order to compel them to make use of public vehicles, whether the latter be oi)orated by private agencies or directly by the Government. All that could be properly done in this direction would be to compel the private vehicle using the public highways to pay license fees or taxes proportionate to the burdens they place upon the highways, as compared with the burden placed upon the highways by the street cars. While there is some diversity of opinion as to the permanency of the electric railway industry, in view of the improvements which are being made in the use of gasoline and electric power machines, the opinion appears to be nearly unanimous that the electric railway operating on tracks is the most efhcient means of furnishing local trans- portation service in the urban centers. The future of the gasoline public conveyance in urban transportation is entirely unreckonable. Great strides have been made and greater strides will doubtless yet be made in its use. Local public authority would indeed be exer- cismg a dangerous power in unduly restricting the use of new inven- tions for public transportation at a time when in nearl}' every large city the physical task, even for an electric railway well equipped, of carrying the public in decent comfort is becoming so formidable. If jitneys and automobile buses acting as common carriei-s were su])ject to regulation by State commissions and were recpiired to procure a certificate of public convenience and necessity before establishing a route or undertaking to render public service, the motor vehicles would be prevented from entering into active com- petition with street car service unless the latter is shown to be wholly inadequate. • That street-railway service and jitney service can not permanently exist and pay their own way in competition with each other under 20 PROCEEDINGS OF EEDEEAL ELECTEIC RAILWAYS COMMISSIOIT. any ordinary urban conditions seems to be well established by experience and by the conditions inherent in local transportation seryice, but the belief is general that the motor bus" may properly be used to supplement the seryice rendered b}^ the street care. The motor bus may be used to render a sort of supplementary seryice, such as the seryice now rendered on Fifth Ayenue and certain other liigh-gradc residential streets in New York City by the Fifth Ayenue Coach Co., or the buses may be operated on other independent routes mereh' as feeders to the street railway system to take care of traffic in partially deyeloped territory in adyance of the time when street railway tracks can be laid with reasonable assurance that the inyest- ment will bo self-sustaining. Undoubtedly, the whole matter of the control or abolishment of jitney competition may be summed up in a few words. All trans- portation seryice is for the public. Jitneys and automobile buses can not be repressed merely for the sake of compelling people to ride on the street cars, particularly if the car fares are higher than the jitney fares and the car seryice less conyenient than the jitney serv- ice. Howeyer, it is clearly in the public interest that all common carriers engaged in local transportation seryice should be required to render adequate and safe service, and that local transportation facilities should bo deyeloped in the most economical and off<>ctiye way from the point of view of the community. Unnecessary and destructiye competition ought not to be permitted, and the com- munity at large should conserve the established facility that still is and promises to continue for an indefinite period the principal means of local transportation. The problem in a considerable measure is a local one, but in every case it should be solved with intelligent regard to the permanent interests and obligations of the community. If the street railways are to be allowed the benefits of even a qualified monopoly, tliey should be required to fulfill their obligations. They must render sorvico that is adequate and con- venient at rates that are attractive. The community can aiford •to go a long, way to preserve street-railway service, and the effixient regulation of jitney and motor bus competition will aid considerably in restoring the confidence of investors in the future of the electric- railway industry and in increasing their gross and net revenues. Section X. DEPRECIATION. The electric railways should adopt the policy of setting aside a depreciation fund with which to take care of replacements and thus preserve the integrity of their investment. It would have a very wholesome effect upon credit. Such has .not been the practice in the past. Deferred maintenance has accumulated to an alarming extent during the war period. Generally speaking, regulating commissions have the power to prescribe metiiods of accounting and to establish the amount of the depreciation fund. This pi'actice should be observed, and its adop- tion will improve the situation of the industry and be greatly in the interest of the public welfare. PROCEEDINGS OF FEDERAL, ELECTRIC RAILWAYS COMMISSION. 21 Section XI. EXTENSIONS SHOULD BE PAID FOR BY ASSESSMENTS ON OUTLYING PROPERTY BENEFITED. Your Commission would iirr^e that in cvcrv community, wliore and to such extent as may be practicable, consideration be ^ivcn to the advisability of requirinoj extensions and rapid transit systems of subway and elevated to be paid for, not out of new capital invested through the medium of bonds or stock, which moans for all time an added burden upon the car rider, but from special taxes assessed against the owners of property in the district the value of which is enhanced by such extensions. This would not be a new principle; it would be merely the applica- tion of an old principle. The American property owner has been accustomed to contributing out of the increase in value of his property to the cost of building streets and other public improvements. The principle is peculiarly applicable to improvements of city transporta- tion systems, because of the enormous increases in real estate values created when now extensions open up new territory or when the creation of rapid-transit facihties make outlying territory more avail- able. The City Club of New York, in 1908, a few years after the extension of the New York subway from One hundred and thirty-fifth to Two hundred and thirtieth Streets, in Manhattan, had been built at a cost of §7,375,000, made an authoritative study of new real estate values created by that extension in the district lying between One hundred and tliirty-fifth and Two hundred and thirtieth Streets. After deducting §20,000,000 as a liberal estimate, based upon studies of parallel situations, of the natural increase in property values in that district wiiich would have taken place without the subv.'ay extension, it was found that the increase in values clearly brought about by the subway extensions was $49,200,000, an amount upward of seven times the cost of the improvements. The property in the district enjoyed an increase in value of 104 per cent. If, by assessment, it bad borne the entire cost of the extension in the district, it would have still retained a new profit on the value of the land of 89 per cent, or an aggregate of S41,825,000 for the district. The Manhattan extension just referred to, together with The Bronx extension beyond One hundred and thirty-fifth Street, cost $13,075,000. These" two extensions directly created, in a lunited area lying near those exten- sions, new land values solely due to the extensions of $80,500,000. Let it be borne in mind that the cost of the entire subway system from the Battery to Two hundred and thirtieth Street in Manhattan and to Bronx Park was about $43,000,000. In Philadelphia recent estimates of improvements in land values expected from rapid-transit projects in contemplation have been equally enlightening. Similar results would be certainly obtained in many otlier cities by studies similar to that made by the City Club of New York. Is it not in accordance with the laws of economic justice, then, that the landowner, as such, should share his benefit of increased land value with the public? Instead of the cost, $7,375,000, of the Manhattan extension being borne by the owners of the land in the newly served territory, it was capitalized and translated into an an- nual charge of $350,000 or more, a burden which had to be borne out 22 PROCEEDINGS OF FEDERAL ELECTRIC RAILWAYS COMMISSION. of the car fares and which to-day hcl])s to intcTisify tlio financial predicament in which the company finds itself. If the pubhc pays out of its fares for the cost of maintaining and operating the line which will bring the outlying landowners such enrichment, should the latter not share with the pubhc out of that enrichment, depending upon the degree in which he is benefited, by paying for or t3y helping to pay for the initial cost of construction of the line? That such a solu- tion is just is rather significantly shown l>y the fact that in a number of cities landowners in outlying districts have offered spontaneously to contri])ute large sums to the company to assist it in constructing certain extensions. The present predicament of the street-railway companies is in many places partly duo to overbuilding, a fault traceable to political or business pressures exerted by speculators in suburban lands who had little -or no financial responsibihty in con- nection \\dth the street-railway extensions which they caused to be built for their immediate benefit. This action of the suburban land- OAvners of certain cities, on the other hand, is a significant expression of enlightened self-interest and a sound, constructive recognition of a fundamental principle of justice. The establishment of that principle by law, whether by changes in city ordinances. State statutes, or State constitutions, should, in our opinion, not be delayed. This thought is especially recommended to the attention of a number of communities which are now facing the necessity of extensions or rapid-transit improvements. Three points in this connection should be briefly touched upon: First. The amount of the assessment on any owner would proba- bly have to become fixed by an appraisal sometime after the con- struction of the improvement, and the owner should be given the option of pa3nng his assessment in instalhnents over a course of years. Consequently the actual first financing of the extension might have to be by the city. •Second. It will doubtless be urged by some that such a sj^stem for building extensions would lead to municipal ownership. (Jn the con- trary, it seems to us that if properly administered it could, by reduc- ing the acuteness of the fare question, serve with much force to offset the pressm'e for municipal ownership. Third. As to the problems incident to allowing a private company, for a nominal rent and in retm'n for undertakings as to repair and maintenance, to take over or use public property, similar problems incident to similar arrangements have already been ably and eflec- tively handled in Boston and a number of other cities under State or municipal regulation in connection with subways and other structures. If objection to the employment of such principle in constructing extensions be made upon the ground that public officers and land- owners along the line of the proposed extension are thus given the pov/er to veto such extension, let it be remenibered that the problem of extensions is not only a serious financial problem, but is also essen- tially and finally a long-range social ])rol)lem. The development of a city's street railwa3^s should be guided primarily not by the fortuitous financial expediencies of a small group of l)ankers or real estate operator. It should be guided by the loresight and vision of those who are officially responsible for planning the city's growth and life, in terms of its water supply, its light, its streets, its sewers, its schools, PROCEEDINGS OF FEDERAL ELECTRIC RAILWAYS COMMISSIOiT. 23 its parks, its playgrounds, its civic centers, its night amusements, its community life, its libraries, its hospitals. It should be gui(h'd by those whose public duty it is to be interested in the health and happiness of the average city toiler and his family of growing childi-en. The call for municipal ownership to-day does not all emanate from dissatisfaction with the service in a nairow sense as riding faeihties. It is largely an expression of feeling on the part of many that tho street railway, instead of helping to make conditions bearable, is contributing to making them unbearable; that it is not, with the func- tions and powers which it exercises, accomplishing what it might accomplish to reduce the abnormalities of cit}^ life. While areas within the city remain undeveloped and unserved by adequate transporta- tion, toiling thousands find themselves dragged out miles fartlier, not to gi-een lawns and spaces, but to a repetition of the same ugly con- gestion that they kiiow in the city. The time will come when emplo3'ers and educators will be forced to take cognizance of the impah-ment in working efTicicncy caused by such inconveniences as are suffered by the traveling public to-day. The time is approach- ing when cities will find it necessary to extend their street railways not on the basis of new property values or the earnings of j^ny single line of r?uls, but on the basis, primarily, of what will be most con- sistent with the pul)lic health, and public economy. These motives are strongly at work underneath our situation to-day. The public's control over stock issues, service, routes, ex- tensions, etc., is needed to-day not only in order that as part of a plan for restoring the credit of the street railways the community's interest may be protected by the guarantee of eificient management, but also because the city of to-day is taldng a more conscious, con- structive interest in the city of to-morrow. That interest can be recognized and cared for under private operation if the public au- thorities have the suggested controls. If such controls do not come into effective existence, then one of the strongest forces making for municipal ownership will continue to exert an increasing inliuence. Yom- Commission trusts that this principle of paying wholly or in part for tho construction of extensions out of special taxation pf bent-fited property vrill be seriously studied and adopted where pos- sible. It seems fundamentally sound. While its adoption presents legal difficulties, as has the adoption of many another ne^dy recog- nized in.' us trial-economic relation, it holds great promise for reduc- ing the fi lanciai problems incident to public transportation. Sectiox XII. RATE OF RETURN. It is an axiom that property devoted to the public use should secure a fair rate of return. Where money is represented by bonds the return is a part of the contract and is not changed dming the life of the contract. Where capital is represented bv stock, the rate of return may vary according to the operating or financial conditions, and naturally it should compare favorabl}' with the income upon other classes of investment. The undisputed testimony i)roves that the rate must be certain as well as reasonable to attract capital and that the absence of either of these essentials will frighten the investor away. It may be a lamentable fact, but it is nevertheless true, that 24 PROCEEDINGS OF FEDEEAL ELECTRIC RAILWAYS COMMISSION. most of the electric railways are obliged to go to markets outside of tlicir territory to sccm'e new capital; and under existing circum- stances the investor is no longer willing to place his money in specu- lative properties. The experience during the Avar period has taught investors that a fixed franchise fare fails to meet the requirements of the industry and there is no dissent from the suggestion that such a fixed fare is a relic of a bygone age. lliere are certain conspicuous examples of an adherence to a contract fare which may be referred to, but they do not affect our conclusion that the rate of fare must be subject to prompt revision according to the needs of the par- ticular property. Section XIII. REGULATION OF PUBLIC UTILITIES. The foundation stone of the relations between communities and the companies must be the local authority under which they are per- mitted to conduct business. Since practically in all States the local government alone has the power to permit the use of highways by electric railways, the primary authority is the franchise grant or agreement containing the permit. Franchises are of vaiying terms and conditions. Until recently the franchises were generally limited to a certain number of years, but now it seems to be the settled con- viction that such contracts are inherently imperfect. A reserve fund set aside during the term to take care of the property at the ex}nra- tion of the franchise would result in increased charges for services; and, upon the other hand, the failure to take care of the investment in this way leaves the company at the Avill and caj^rice of the public. Instances have been referred to in this record where the railways are having difficulty in securing nev/ franchises, while in some communities there seems to be a disposition to take over the property for junk values. Under these conditions it is natural for the company to neglect maintenance and give poor service. From the evidence it appears that there will be difficulty hereafter in securing new capital for properties that are governed by such franchises. The undisputed testimony favors an indetciininate franchise by which the company is permitted to operate subject to the right of the public to take over the proper t}^ by paymg its value or agreed price. Such contracts protect both the investment against confiscation and the public against extortion by providmg for payment of just com- pensation for the use of the property. The indetermijiate franchise has been most thoroughly developed in the State of Wisconsin, and it has been recognized m the District of Columbia, and the States of Indiana and Massachusetts. Its earlier adoption by other States and communities would have prevented many conflicts and misunder- standings. We })elieve that this form of franchise should receive the favorable consideration of tlie public. Prior to 1907 the regulation of electric railways was principally confined to the municipalities. The history of this industry is replete with examples where municipal corruption has resulted from this control. The street railway is, however, essentially a local insti- tution and it can not permanently prosper unless it has the confi- dence and cooperation of the public which it serves. Since 1007 many States have taken over the control and regulation of this service and the communities within those States have been PROCEEDINGS OF FEDERAL ELECTRIC RAILWAYS COMMISSION. 25 deprived of all jurisdiction. While the evidence shows that exclu- sive State control is preferable to exclusive municipal control, yet there appears to be a happy middle ground by which the municipali- ties may exercise control of the things that are peculiarly within their province, and the State retain jurisdiction over all other matters and also exercise supervision over the action of the local tribunals. No general rule would fit all cases. We have street railways which do not extend beyond the limits of a city, others where two or more systems operate "in the same city, white frequently a single company operates in. through, and between a largo number of cities and villages. In New Jersey one svstem serves practi(udly the whole State, and the same condition exists in Connecticut. Manifestly no rule of thumb can apply to these difl'erent conditions. The tendency is to extend the mileage and service of street railways and to unite different companies under one management, and as our cities and villages grow and tlie rural country becomes more populous and prosperous these electric rail- ways M'ill extend their lines to meet the growing demands. Under such conditions safety, efficiency, and economy will be promoted by extending to a superior regulatory board the control of the practices, rules, regulations, security issues, the system of accounts, and the charires to be paid for the service. Elective local control is well-nigh impossible where a single com- pany spreads out over an entire section of the State and this condition even constitutes a serious obstacle to municinal ovniership. Wliere the street raihvay company operates wholly within one city there can be no insuT)erable objection to exclusive municipal control, wlien the people are re«dy and willing to exercise it. Secretary Baker testified upon this point as follows: Because I think the responsibility for the management of its own affairs is the greatest educational influence that the city of Cleveland has. The fact that the people of the city had -^tuaied and grasped and solved an intricate and complicated problem like the street-railway problem has made them a more self-conscious and a stronger, more virile people tlian they were before that problem was put up to them; and I should be very sorry indeed to see the responsibility for theii- own ailairs in as intimate and important matter as street-railway service taken away and transferred to a State agency. Cleveland has made a more extensive study of the electric railway problem than any other city in the country. Intelligent regulation can not be secm-ed without the assistance oi expert operative, statis- tical, and engineering departments, and these are expensive items in any municipal budget. In some resj^ects uniformity is not only desirable but essential. This applies to the control of seciu'ity issue*, to accounting, the study and determination of depreciation and the control of such funds, fixing reason a))le maintenance standards and their enforcement, and the methods and principles to be employed in valuing properties, either for rate making, capitalization, condemnation, or purchase. In a general v/ay, the rules and principles which may be applied to the electric railway industry will be found available for other utilities, such as telephone, electric light, heating, power, and gas and water companies. In our judgment the State public service commissions should determine finally these matters, subject, of coui-se, to an appeal to the courts where they err in judgment or transgress the law. 26 PKOCEEDINGS OF FEDEEAL. ELECTRIC RAILWAYS COMMISSION. Kegiilation by municipalities should bo subject to an appeal to the State public service commission, tlius bringing to bear upon the ques- tion involved the judgment of a body of men somewhat aloof from local influences. This would place the final authority in the .State, and surely the communities, which are l)ut subdivisions of the State, shoidd prefer to submit their cause to a State tribunal in preference to a court, wliich rarely, if ever, has any regulating experience. Theoretically, State control is removed from the influence of com- munity prejudices. It certainly exercises its functions with a more judicial attitude, and with greater equity to both the communities and the companies; probably it is in most instances more economical and more efficient, since the State can create a better and more com- prehensive organization for regulation at less cost. State control obviates conflict of authority between communities that is bomid to obtain when utilities operate beyond the limits of a single munici- pality. It makes unnecessary the erection of metropolitan or public utility districts in order to secure uniform regulation, and it also results in a large saving to single communities which would other^vise be obliged to maintain its expert departments to perform this service. The possibility of combining the best features of State and local regidation through a division of powers and duties was suggested by several witnesses and has been carefully considered by this Commis- sion. It would seem to be desirable to leave to the communities, at least in the firet instance, the determmation of such questions as the assignments of streets upon which the railways may operate, ques- tions involving speed, stops, schedules, rerouting of cars, and service during peak hours and otherwise, the extension of tracks, rate of fare, and the securing of certain statistical information where such informa- tion does not d^iroctly interfere with the accounting rules which have been prescribed b}^ the State. Under these conditions the cities would be compelled to take a chrect interest in the transportation business, leading to a more wholesome cooperation between tne public -and the railways. We believe this principle is worth trying, because it places the initial regulating rosponsibijity upon the community, thus leaving the way open for sympathetic understanding and coop- eration between the public and the industry, without which the industry can not survive, and yet places the flnal responsibility upon the State, which is best equipped to determine the questions involved in a sane, consistent, and impartial manner. In a number of States commissions now have complete authority over all cpiestions. There should be no change if the people are satis- fied with that policy. It has unquestionably Avorked w^ell in most of these States. We do, however, desire to emphasize our belief that any form of regulation will fail of its ]:)urpose if it does not secure public coo])eration in the conduct of the utility. Our study of con- ditions as they exist in the principal cities of the country has shown that unless the public is in sympathy with the purposes of the nian- agement and lends assistance in their acliievement, neitlun- efficient nor econcmical service is possible. Cooperation can not be obtained unless the public be informed as to aU pliases of the electric railway problem — financial, economical, and operating — and will not bo con- tinued unless the process and information is continued. This psychological factor involves a continuing task of undoubted magni- tude, but whatever the regulatory authority may be, and however PROCEEDINGS OF FEDERAL ELECTRIC RAILWAYS COMMISSION. 27 g:reat the difTiciiltics, the duty involved must he performed if the i-eJa- tions of the piihlic and these highjy essential utilities are to bo main- tained upon a basis that will insure })roper service. The electric railway problems admit of a satisfactory solution onco the elements that compose them are made known and the process of ordinary economic and nusiness common sense are applied. The duty of both the public authorities and those who control the electric rail- way cnter])i'ises of the country is plainly indicated. The time has come for a permanent and satisfactory settlement of the traction question. Tlio interests of both the public and the com})anies lie so exactly paralJel in almost every respect that thei-e ought not to be any serious difficulty in arriving at a solution if both parties approach the subject in a proper spirit. Section XIV. service-Xt-cost plans. The electric railways have responded to the improvements in the arts and sciences, and it may also be said that the science of regula- tion has fairly kept pace with the requirements of public service and the growth of the industry. Franchises have been the result of experiment. The contract fare established an unsound rate basis, and in some instances commissions were slow to reach conclusions in rate cases. Investors lost confidence in the electric-railway busi- ness. It was thought that a contract must be evolved which would meet all the requirements of the industry as well as of the public. Thus came the cost-of-service contract. It has worked well in Cleve- land dm'ing the most difficult period in the history of the industry. It seems to have worked fairly well in the other cities where it has been tried out, and to justify the following statement made by Secretary Baker: I believe that any community in America -will pay cheerfully and willingly what- ever rate of fare is necessary to carry the people on their street railroads, and to main- tain good serA-ice in their communities, if they are sure that they are paying only proper operating expenses, proper maintenance, and a proper return on capital. Practically all of the witnesses for the electric-railway industry favored service-at-cost franchises. That service should be provided at cost is not a new principle in the regulation of public utilities. It is back of all public service commission regulation, and expresses the reaction from the original contractual relations between utilities and communities, under which fares were fixed and limited, wliile return was not. The apphcation of the term "service at cost" in recent working agreements between the electric railways and the cities of Cleveland, Cincinnati, Dallas, Montreal, and to a limited extent the city of Boston, does not clearly describe such agreements. They are, in effect, devices for automatically and quickly adjust- ing price to cost. It is, therefore, not so much the principle back of such plans as it is the method provided for carrying that principle out that concerns the Commission in this phase of the traction prob- lem. Without going into unnecessary detail, it will suffice to state that the main features of the contract are: (a) Fair valuation of the property. (b) Capitalization to conform thereto. (c) Agreed return upon capital. 28 PROCEEDINGS OF FEDEEAL ELECTRIC RAILWAYS COMMISSION. ((I) Public control of capital issues, and, to a certain extent, over expenditures. (e) Public supervision over management, operation, and service. (f) Automatic changes of rates, to meet fluctuating economic conditions, and to insure a proper return on the value. (g) Private operation, subject to the right of the municipality to purchase the property at its value, or upon an agreed price. (h) Reduction of taxes and assessments. The service-at-cost contract is still in its experimental stage, and naturally a number of criticisms have been made of it. These have been considered, but with the limited experience under this contract we believe that the criticisms are more theoretical than real. If these defects prove to be substantial and result in unduly increasing the cost of service, they can be removed by improved regulation, but if they can not finally be avoided, then it would seem that the public has ample protection in the contract's purchase provisions. Generally speaking, the main criticism of this form of contract is that it tends toward inefficiency and uneconomic operation; that it contains no provision for the control of strikes, or uninterrupted service; and that labor and management may cooperatively increase the cost of operation to the point where the public may be unduly burdened. From the point of view of credit restoration, the outstanding advantage of this contract is that rates are automatically adjusted to meet changing operating conditions. We are inclined to think that the assurance of an automatic adjustment of fare will do more than anything else to restore the confidence of the investor in these properties. Pul)Iic confidence will be immeasurably strenghtened through the valuation of the properties, because the figure that is established constitutes the basis of the return to the investor, and fixes at least the minimum price which the public will be obliged to pay if, at some future time, it should decide to purchase and operate the property. Vvlien the value is thus fixed, there can be no further dispute as to capitalization or excessive profits, because the people will know just v/hat they arc paying for. The controlling element in its favor is the restoration of ])u})lic confidence in the corporation, due to the removal of those elements of friction which have so fre- quently engaged the attention of the public. It might also be said that to a certain extent it removes the railways from the idea of speculative gain, and places tliem upon a common-sense business basis where the people pay for the service they get, and where the opportunity for large profits no longer exists, since economies and lower operating costs are reflected in reduced charges for service. When the contract is once establislied, the opportunity for municipal corruption is reduced to the miifimum. We strongly recommend the principles of the servicc-at-cost con- tract, not as the only solution, but as one means of solving a very difficult problem. In cases where the electric railways operate in more than one municipality and between dilTerent munici])ahties, such service-at- cost contracts can properly, in our judgment, be made only with the public-service commission, and in sucii cases the provisions of the contract should a])ply in any })articuhxr community to the system as a whole rather than to its individual parts. PROCEEDINGS OF FEDERAL ELECTRIC RAILWAYS COMMISSION. 29 Section XV. PUBLIC OWNERSHIP AND OPERATION. It is urged by many that public rcg-ulation of the street railways has failed, and that the pronerties should be taken over by the munici- palities or the Stjvte. Dr. Dcloa F. Wilcox concluded his able and interesting analysis of the testimony given in this connection with that suggestion. wSomo members of the (l^ommission indi\'idually feel that eventually municipal ownership might prove generally desirable and that there may, perhaps, be commimities in the United States in which on account of the responsibility of the local govern- ment and the acuteness of the present conditions, municipal owner- ship should be resorted to. The experience of Boston, wSan Francisco, and Seattle arc being watched with great interest, but they have not continued long enough to justify any conclusion as to the relative merits of public as against private operation. The Commission is unanimous on this point: That there lias not been suflicient experi- ence with public ownership and operation of street railways in this country to enable us to recommend it as a permanent solution of this problem. In some of the foreign countries it has appai'ently worked well. We do not believe under present conditions tnat this method of operation would be successful in most of the cities of the United States to-da}'. Aside from the serious question whether municipalities as at pres- ent organized can operate electric raihvays as efficiently and satis- factorily as private enterprises, our conviction upon tins subject is based upon the great political difficulties Vviiich y,-ouid ha,ve to be overcome, such as constitutional amendment, legislation, and tlie fiscal burdens incident to the purchase by cities of gi-eat public utilities, and upon the further fact that in many sections of the country the lines of the railway extend tlirough many cities and villages and into rural territory. It is assumed, however, that these latter diiTiculties could be mastered by a community thoroughly awakened to the necessity for such a change. We a,re certain that much can be accomplished by private initiative, stimulated and aided by thorough public regulation; that the final solution could, in many communities, be found under private man- agement, and that in any event, the reforms v.'hich have been urged by the Commission should be mstituted, since those reforms would serve to place the relations between the street railway and the public upon a more just and equitable basis. Conclusion. We have conceived the sQope of this inquiry to be to ascertain, first, the actual financial and service conditions of the electric rail- ways of the United States at the present time; second, the causes which have contributed to such conditions; tliird, what readjust- ments of the relations between the electric railways and the commu- nities which they serve must be brought about in order to restore the confidence of the public and to put the companies upon such a finan- cial basis for the future as will enable them to render conthmous and efficient service to their respective communities. We have not entered into a mmute discussion of the different franchise provisions throughout the country, nor have we under- 30 PROCEEDINGS OF FEDERAL ELECTRIC RAILWAYS COMMISSION. taken to suggest any details which should he incorporated into any new contract, but have preferred to confine ourselves to suggesting the br(>ad outlmes of such new relations. The Commission is not pessimistic as to the future. The electric- railway problem admits of a satisfactory solution, once the elements that compose it are made Iviiown and the principles of ordinary economic and busuiess common sense are applied. The dut.y both of the*public authorities and of those who control the electric-railway enterprises of the country is plainly indicated. The time has come for stable and satisfactory settlements of traction difRculties. The Commission can go no further than to point out the principles upon which readjustment should be based. The task is really that of the State and local authorities upon the one hand, and of the companies uDon the other. Failure to rehabilitate the industry and the service is possible only if those upon whom the responsibility rests fail to undertake the work or pursue it in a spirit that makes settlement impossible. Respectfully submitted this 2Sth da}' of July, 1920. Charles E. Elmqulst, Chairman. Edwin F. Sweet, Vice Chairman. P. H. Gadsden. W. D. Ma HON. Royal Meeker. C. W. Beall. Louis B, Weiiie. George L. Baker. O ,'■'. UC SOUTHERN REGIONAL LIBRARY FACILITY AA 001 071 860 9