UNlVERSITi' OF CALIFORNIA AT LOS ANGELES ELECTRICAL RATES By G. P. WATKINS, Ph. D. Formerly Assistant Chief Statistician of the New York Public Service Commission for the First District PUBLISHED BY D. VAN NOSTHAND COMPANY 8 WARREN STREET NEW YORK Copyright, 1921 BY G. P. Watkinb Washington, D. C. ■ Al/riMOBK, MD., r. s- *• >«1 c A'X\A/3 CJ) —3 DEDICATED TO MY MOTHER PTIEFACE This book is aii out^Towth, and in fact a by-product, of the author's practical work. But it is his purpose to offer more of explanation and of constructive application of economic principles than most work of such a nature does, and to go farther into funda- mental economic questions than most practical men, especially busi- ness men, arc likely to go. The standpoint of the writer is that of the economist. This fact largely explains the amount of attention given to differential rate theory. Few engineers appear to appreciate the character and im- portance of the principle of differentiation in rate-making, though they accord it piecemeal recognition under various other names, especially in discussions of " value of service." Economists, while they have given much attention to railroad rates, have interested themselves comparatively little in the related subject of electrical rates. Hence, we should not be surprised to find that the subject has hitherto been handled with too little reference to the composite character and variable nature — variable, that is, aside from changes in costs and prices with time — of the unit cost of electricity. The subject of load factors naturally occupies a large place in the book, as it does in the discussion of electrical rates generally. In this connection the writer's emphasis upon diversity and his con- ception of its relation to the occasion and amount of demand charges constitute what is characteristic and most important in his view- point. Engineers too often ignore diversity as an element in rate theory. But the writer's conception of the importance of the density factor — which relates to the other most discussed phase of electrical rate-making — and of how it should influence the rate schedule is more distinctly or more largely his own. The question as to what the average level of electrical rates should be is not here discussed. Xot only is this, from the point of view of economics, a comparatively simple question, but under stable business conditions it is, in practice, a question to be decided 5 6 Pup:face with rrferonoo to local conditions and for a particular supply com- pjuiy. It is true that the instability of business conditions durinj; and since the War jxives to the matter of ))ri('e levels a very jjrcat present inijiortance; hut this situation only fortifies the reasons for not professing to dispose incidentally of a problem calling for inde- pendent consideration. The subject of relations between difTcrent rates granted by the same company to dilTcrent classes of consumers, by itself, requires sufficiently extended examination from a general or scientific standjioint. The author lays no claim to being absolutely correct and up to date in all the technological details that are directly or indirectly in- volved in the consideration of his subject. If our engineers were as well versed in economics as in engineering, a mere economist would have no excuse for undertaking to deal with the subject of this book. Grateful acknowledgments are due to Professor F. \V. Taussig for effective encouragement to complete and publish this book, which he has seen in manuscrijit at an earlier stage of its develop- ment; and to Professor Comfort A. Adams, who also has read the manuscript and whose favorable judgment of it was particularly encouraging because suggesting that, according to the impressions of an eminent electrical engineer, the technological implications of the study are substantially correct. However, not merely on gen- eral grounds, but also because the manuscript has been considerably revised and extended since it was seen by these gentlemen, neither of them is in any degree responsible for the opinions expressed. The book is an outgrowth of nine years experience and interests developed in the statistical bureau of a public service commission. My incidental indebtedness to associates in that work is doubtless large, but is not susceptible of specification except as regards obli- gations to Mr. L. H. Lubarsky for the construction — by which I do not mean the mere draughting — of the diagrams, with the exception of Diagram III. I have also in a few instances sought and received valuable information from commissions and put)lic utility com- panies. Chapter VII is mainly a reprint, with some additions and minor changes, of an article published in The Quarterly JourtuU of Eco- nomics for August, 19 Hi. Several of the diagrams have also been previously published. Diagram II and Figures 2 and 1 were used P UK FACE 7 1)}' the writer in an article in The (Jnarlrrhj Jonrndl of Economics for May, l!)l(i, entitled "Electrical Kates: 'I'lio Load Factor and the Density Factor." Diagram T and Figure 5 liave ai)poarcd in annual rejiorts of the New York I'ublit! Service Commission for the First District, the former in volume III for l!»l.'^, the latter in volume TTl for 1915. G. P. W ATKINS. Washington, D. C, April 17, 1921. CONTENTS PAGE Preface 3 I. The Peculiar Interest and Importance of Electhical Rates.. 11 II. Types and Elements of Electrical Rates Desciiihed 40 III. The Reimuvrsement of Separable or Prime Co.'-t 83 IV. Cl.'KBs Rates and Rate Differentiation 104 V. Lo.\d-Factor Rates 124 VI. Wholesale Rates and Qiantity Discoints 153 VII. The General Theory of Differential R.ates 191 VIII. Suggestions for a Model Rate ScnmuLE 210 Index of Names 221 Index of Subjects 224 GRAPHIC ILLUSTRATIONS Di.\GRAM I. Load Curves fob New York City, 1913 17 II. Lo.\D Curves for Chicago, 1901-1911 19 " III. Load Curves for a Large Eastern Industrial Center, 1907-1920 22 Figure 1. R.\te Curves for Initial and Small Consumption 44 " 2. Block and Step Rate Curves 45 " 3. Variation of Aggregate Price with AGGREG.^TE Quantity. 48 " 4. Rate Curves Under Hopkinson and Wright Tites 55 " 5. AcTu.vL Rate Cur\'es illustrating a Thoroughgoing Applic.\tion of the Quantity-Block Method 160 CHAPTER r THE PECULIAR INTEREST AND IMPORTANCE OF ELECTRICAL RATES Importance and interest of the subject. Nature of the genus of which electrical rates are a species. Heavy fixed charges generic and the im- portance of the load factor specific. The load factor. Thi.s and related terms as defined by the American Institute of Electrical Engincei-s. Description and significance of the load factor. Unutilized capacity. Illustration by load curves. Factors of certain large systems. The load factor an economic matter. Limited applicability to gas rates. Further jnattcrs of economic technology. " Increasing returns." The capacity of generating units. Range of capacity of central stations. Tendency to centralization. The density factor. Continuous rating and overload capacity. Qualifications of the significance of ratings. Alternating and direct current systems. Interconnection of power plants. The development and importance of electricity supply. The growth of less than four decades. The hydro-electric element. Comparisons with other industries. The lowering of average rates. The problem confronting regulating bodies. Legal precedent and the ad- ministrative situation not subjects of study in this essay. Laek of estab- lished administrative policies as regards electrical rates. Adequacy of powers. Diflfidence of commissions. To obtain the means of satisfying any and every want by " press- ing the button " has become proverbial as suggesting the easy accomplishment of large results. The reference is to actual achieve- ments and idealized possibilities of the use of electricity. Upon analyzing the notion with a view to determining Just what is implied, one finds an underlying assumption of elaborate material equipment and adjustments in preparation for " pressing the but- ton." The ease achieved presupposes heavy investment in fixed capital as well as invention and engineering contrivance. This situation is characteristic of the use of electricity. Payment for such use must reflect these conditions. The utilization of energy from a waterfall a hundred miles away in preparing one's break- fast — perhaps eaten early and by electric light — on the table by turning on the current for an electric percolator, toaster, etc., pre- sents a problem in the adjustment of the payment for the services involved that is incomparably more complex than is, for example, the payment of a servant to prepare the breakfast in the kitchen and place it on the table. 11 2 13 Klectrical Kates Electrical rates and railroad nitcs are species of the same genus. The latter have constituted one of the most discussed economic and administrative problems of onr time. Electrical rates having the general character indicated, if they have also outstanding peculiari- ties of their own, should be of great economic interest. Heavy investment of fixed capital, both absolutely and in pro- portion to total capital, is, according to many economists, the principal explanatory key to the general problem of differential rates. Others emphasize the possession of monopoly power by the enterprises in question. But in either case the economic similiarity between an electric central station and a railroad is evident. The business of electric supply ranks very hiijh in respect of proportion of fixed capital employed and is likewise a monopolistic public service, hence it presents the underlying conditions productive of complex and dilTerential rates. When account is taken of the rapid obsolescence of electrical apparatus, for which due allowance must be made among carr}^ing charges, it is possible that the proportion of revenues that must be devoted to fixed charges in tliis broader sense is higher for this particular class of public-service enter- prises than for any other. But for present purposes it suffices merely to mention this point. The great distinguishing characteristic of electrical rates, how- ever, is due to the load factor. But the significance of the load factor is in turn dependent upon heavy investment of fixed capital. The Load Factor The load factor is_the ratio of average to maximum demand. For a more formal and authoritative definition the reader is referred to the Standardization Rules of the American Institute of Elec- trical Engineers, which cover also several other terms more or less distinctive of electricity supply of which use is made in this book.* The load factor is of general economic interest as well as of peculiar importance for electrical rates. ' Following are varfouv deflnitlonR as quoted from the Standardization Rules, edition of 1016. Occasional coinnient of the writer is put in bnu-ketH. The Load Factor of a machine, plant or nystcm. The ratio of the nvcraRo power to the maximum power durinif a certain period of time. Tlic average power Ik tnlcen over a certain pcrlcxi of time nuch an a day, a month, or a ye«r, and tlic maximum la tal(f--n nil the avemge over a hhort interval of the maximum load within that period. In each caw?, the interval of maximum load and the period over which the averafr« if taken khould be definitely upecifled, iuch a« a " half-hour monthly " load factor. Intehest and JMroHTANCE OK Elkcthical Kates 13 By lo ad is inoaii t th e; kilowatts carricMl Ijy a j)owor station or gcncratoror ot her machine, or the kilowjitt.s required by a coiib u- m er or group of consumers. Kilowatts, though primarily a measure of capacity, in this connection serve to measure tiie rate of output or of consumption of energy. Thds^te of output at a given time corresponds to the utili zed capacity, or the load, at that time. S^ j7ite__QJLxuttjiu tof one kilowatt k e pt up d uring one hour gives a quantJty_of__Qutput of one kilowaU hour. . So, in order to arrive '"STnie average output (or averageload ) of some specified power The proper inten'al and period are usually dependent upon local conditions and upon the purpose for which the load factor is to be used. riant Factor. The rat io of. the ave ra^rp ]qj,,\ );q the, ratprl capacity of the p ower ^ plant, that is, to tho^ggrogate ratiiip> of the generators. [This conception is familiar in the gas inrfustry under tiie name capacity factor and the idea is of general economic applicability and significance. Doubtless the Standards Committee wishes to make the term specific, "capacity" having too general a reference.] The Demand of an Inxtallatioii or Si/stem is the load which is drawn fro m the source of supply a^ i ;ne 7p^'V'"Pr terminals averaged over a suitable and specified interval of time. Demand is e.xpressed in kilowatts, kilovolt-aniperes, amperes, or other suitable units. [It is inevitable tliat " demand " will be used also in the economic sense, mean- ing the quantity that will be taken at a specified price. The phrase " average demand " relates both to this and to the above conception.] The Maximum Demand of an histall ation or Si /i^tClP ^'^ the gi-p ^test of all the demands It is determined by measurement, according tha t have occurrod during a given nerio d ta specifications, over a prescribed time interval. [The change made in this definition in 1916 leaves it in principle the same, but the previous wording — which was " greatest demand, as measured not instantaneously, but over a suitable and specific interval, Buch as ' a five-minute ma.\inium demand ' " — is interesting for its negative emphasis.] Demand Factor. The r^tjg of the maximum demand of any system, "<• pjirti "^ ° -ietaL connected load of the system, or of the part of the system, under consideration. Diversity Factor. Tl; £_ratio of the sum of the maximum nower demands of tha s ub- rfiviKJqnf! nf any system or parts o f a system to the ma-xJTmrftl dema nd of the w^)nl B rvs- _te^_OiUQt.^e part of the sy.stem liMST tionglflgfationr measured at the point ofsupp Tv- "TAd individuaTcoti yuMiei, uf wur SeT has nondiversity factor! But he may be said to have a diversity in relation to the combined peak, which may be considered propor- tionate to the difference between his demand at the time of the combined peak in question and his individual peak, or else to the ratio between his rate of consumption then and his average rate of consumption. The second is the more significant point and is important enough to have a name of its own. Diversity ratio seems to be appropriate.] Connected Load. The combined co ntinuous rating of all the receiving apparatus on consumers' premises, conu^Jt M.uiJ lu tliiTsystem or part of t he system under consideration. Power Factor. The ratio of the power [cyclic average of the products of current and voltage in an alternating current circuit, as indicated by a wattmeter] to the volt- amperes. [Chiefly of technological interest.] The terms load factor and diversity factor were both current in various senses before (and to a considerable extent since) their official recognition and definition by the Ameri- can Institute of Electrical Engineers, the former in June, 1907, the latter in June, 1911, by action of its Board of Director.s. Aa supplementary to the definition of load factor adopted by the American Institute of Electrical Engineers, the following rules of the Association of Edison Illuminating Com- 14 Electrical Kates station for ii voar it is only noccssary to divide the kilowatt-hour output for the year hy STUO, llu* nunihor of hours in the year; vhiih gives one term of the load-factor ratio. The other term is the highest recorded output for some hrief interval — live minutes, fifteen minutes, or lialf an hour, or pos- sihly longer. Sometimes the instantaneous max inmm has b een used, bu t the AiTKTtTTm Tji gtitlTI co^ .hjlec trical i^gincera_d isap- ')->ro\Ts~This. d oubtless because the capacity of a gencp Ltor-im^a brief intgrvaTls much greater than its continuous rating, so th at the tech nical and economic signific a nce of a l oad factorJiased upon an instantaneous m aximum, probab ly the result of a brief fluctua- tierifKl. DilTerent time interviiN varjing from one hour to the insUintaneous de- mand may, however, be specified for Industrial power and for railroad service, depend- ing upon tbo local conditions and the characteristics of the cpecial service. Interest ani» Imi'oktaxce or Elkc rmrAL Kates 15 ingly grates and boilers must l)e designed so that the quantity of water vaporized can be doul)led on a moment's notice, and the generators must be able to take care of rapid changes in the load. Irregularit y of ec onomic dcma iul and its concentration upon peak lioursaret 1 l o re fore very £ nst] Y nnd — regni rc special at tention ia rate-making. A qualification is necessary, however, with refer- follie overload capacity of generating and other equipment, available for brief intervals of time. Some degree of operating elasticity is obtainable in this way. But the carrying of an over- load for any considerable period of time causes a destructive over- heating of the machine. The operating problems occasioned by the peak load are, how- ever, of comparatively small general bearing. If engineers and managers were not able to meet them they could not retain the business. At the steam end, devices have been perfected to permit of greatly increasing almost instantaneously the amount of water vaporized, and the adaptability of generators to variations in the load has also been greatly increased. So far as sharp and sudden peaks increase operating costs, the costs should of course be re- covered, if possible in the rates charged to consumers responsiljle for them. The more_Jundamental aspect of the importaiice^f the load factor t o the electrical company i s^ the necessity of providing a p't gnT'suffic iont to meet maxi mum demand. ^Vfost of the time the capacity of fne" plant is utilized only to a small extent. A con- sumer who takes energy almost exclusively at the " peak of the load" requires generating capacity proportionate to the rate of supply necessitated at that time, for which capacity there may be no use at other times. A consumer whose demand is entirely " off- peak," on the other hand, requires no additional ])lant capacity and imposes no fixed charges attributable directly to him. It is obvious that the same kilowatt-hour rate for both is not prima facie equitable. Loadcurves- are the b eet ^means of indicating tl ie character o| the va riation of _ the load for d iffe rent companies and TnTF erer/t peTiodsl The diurnal variation most readily lends itself to graphic relJfeseiitation, though there is a characteristic seasonal variation or cycle that is of scarcely less importance, and there is also a weekly cycle. Following are diagrams illustrative of the character of If) Electkical Rates diurnal loail curves. The first compares winter and Kumnier diur- nal curves for several New York City companies; the second shows the development of the curve of the Commonwealth Edison Co. of Chicago tlirough a series of years; the third shows the develop- ment from 1907 to date of the load of the electrical .tsystem of a representative P^astcrn industrial center.' Diagram I shows the comi>;irative variation of the load for the two largest electrical comj)anies in Xew York City and for the • The sporial use of the por c-cnt index pliin in the ounes o( all three of theae load dla- rram.1 callR for brief explanation. It is choson as the boKt meann of nhowing rom{iarative variation of electrical loads. In preparation for plottin);, the Rgvrt for the average load for the 24-hour period Is divided into each of tlic hourly (Di.tirrania I and III) or h.-ilf hourly (UiaKTum II) valueo in the series of data for the particular company or year. The quotiei^ta (per cents) thuB obtained are plotted nl)o\e and below a »nenn axis, which reprcKents unity or the average (the divisor). The value of a unit of the scale is therefore different for each curve and the curves do not show kilowatt.s. The emphasis is upon relative (per cent) variation from the a^erage instead of upon absolute chaiiKes. The curves are merely a special type of arithmetical curve, being referred to a 100 per cent axis, regardlesn of the absolute value of the KC'rie!<, instead of to a zero ba«e. F.ach curve varies above and below ita own axis. Ordinary arithmetical curves, if more thaa two or three in number and reprosenting magnitudes at all diversified, cannot be compared to advantage with reference to their relative variation. The relative range of variation — of which the load factor is a function — is what is .•.igniflcant in the above curve*. The eye can readily grasp resemblances and differences in this respect, as it cannot when all these curves are drawn to the same arithmetical scale. If the re uler is interested in statislii-al graphics, he should compare the above Diagram II with the representation of the same facta by curves drawn to a single ordinary arithmetical scale in the Report it> the Com- mittee on Ga-s, Oil and Electric Light (Chicago City Council) on the Investigation of the Commonwealth Edison Co., May, 1913, p. 22. There the relative variations are distorted and made difficult or impossible of comparison. These curves possess in large degree the propeiiy that is the special advantage of logarith- mic curves in that they express relativity. But they are at the same time more readily und^-rt>tood by the layman who has not enough u-se for the latter to furnish him with the neccssarj' incentive to learn what they mean. It is importJint to note that in the per cent index curves the relativity in question applies as between the various curves, but not a« between parts (equal intercepts on the ordinates) at different heights of the same curve. In other words, the 10 points between 120 and 13(l p'-r cent are not relatively of the sani* ligniflcance as the 10 points between 80 and 90. In a logarithmic curve, on the other hand, there is true relativity ax between its parts, so that, for example, the graphic value of U»e 10 lolnts between 80 and HO Is equal to that of the 1.'. points between 120 and IS.*). Hut the oJiistancy of the reprehcntation of equivalent kilowatts for Uie parts of thp same cur^e U probubly an advantage of the per cent index curve Us<-<1 as It is in tliose two diagrams. If one were to attempt to draw-in the zero bam-s for the per cent index curves (especially In II and III), the result would he merely confusing. To omit the base would be very bad graphic practice for ordinary arithmetical curves, hecaute in such a case the area between the curve and the base line is primarily slgniflcunt and the course of the cun-e Is signiflcant only because It shows the development and vari.ntlon of that area. So far as the same principle applies to tlir«« per cent Index curves, it is the variation of the area between the cune and th* axis tluil is significant. Hut where the zero bnne is eqviidlstant fmm each of the axes of ief.-ien<^'. the i ITe. t i» much like that for logarithmic cunes. In the latter ca^ the zero ba*« is Inflnitely distant to that tho ix.Kltlon of the curves in relation to each other cmn b« ahlfted vertically at will with a view to better comparison. SCALE FOR 5UMMER WEEK Diagram i Summer and Winter Average Variation of Load New YORK City SCALE ron WINTER W££K A. M. 6 A NOOI^ 10 II 12 I p. M. 280 270 200 250 240 230 220 210 ISO 160 130 120 110 100 90 80 70 60 50 40 30 ■rr-^ , \ "■<* PER CENT INDEX LOAD CURVES - i 1 7- \ \ 1 1 A ^ SHOWING 2A-H0UR VARIATION N.Y EDISON iNCL.UNITED ELECT. A. AVER. 4WEEK DAYS. DEC. 191! B. .. - - JULY 1913 C. .. - - .. DEC. 1913 BROOKLYN EDISON D. AVER 4WEEK DAYS. DEC. 1913 E. •• 5 •• MAY 1913 / r }\\ (j 1 '\ '. \ i K' *> • !k t \ .^s !h \ l\\ FLATBUSH GAS <, , '// *>c \ \'-; F. AVER. 4WEEK DAYS. DEC. 1913 G. " 5 •• •• JULY 1913 . /2f/i M\ \\ , W' >: \\ hi\ / /r /: \ ' i ^' — — < 1— ^ / / \ 'i f..... \ 1 yy' \\ / / / 1 \ \: AX S FO » ' / *.. \> ' / t i ^ N\N\TZf 1 j /\weeV<\ il y \/ '■ 1 ; J \ T \M-- ...Im •.., ,•' I i \ \ 1 i i i 1 1 \mp-. 1 1 / \ ' f 1 i \ V P-_ \ Ifi \ 1 r" ■ ■9 '/( V 1 1 ^. -, A fl 7 / ••' '• 1 i \ \ \ \ "7f V ^■> y ••' ■ •.. ,• .^' .s- '^V ^ 1 1 1 1 \ \ \ I "^1 ^■^V ..-. /^' 1 >- 1 / ..E_ -•, \ \ \ • II I \ \ 1 \ / / y ^.^ ■■^' ',\ I / r 1 ^ I \ \ V \ 1 r \ \ v !f ' \ AX S 1 1 1 ' FO ? \ 1 SI )M^ lER \ \ /.' wee:k \ \ p_. 1 1 1 • \ 1 \ 'ill \ 1 1 ' t 1 / i \ i \t \ fl- E / '\ V / 1 ; \ / ' r i B ' . / ^ "X. ■^v / .' \ , / V ■V \ 1 1 / ..«?.. .6. • V \ s. 7- / /.. ••■' •..\, ,A — '-- 210 aoo i»o lao 170 leo IftO 140 130 120 110 100 90 60 70 60 50 40 30 12 I 2 3 A 5 6 7 e 9 10 II 12 I 2 3 4. A. M. NOON 5 6 7 e 9 10 II 12 P. M. 18 Electiucai. lUii-a electrical department of a comparatively small gas-elcctriiul com- pany ' serving an outlying district. Two associated companies are com!)ino(l in the case of the New York Edison curves because sup- plied by the same generating stations. Eor this system, moreover, a 1911 as well as a 1913 curve is given, because of the acccBsion meanwhile of the large Third Ave. street-railway load, the efTect of which upon curve C as compared with curve A is interesting. For present purposes the slightest suggestion of the significance of the dilTerences between these curves is sufficient. The lato - afternoon winter pc jik of the New York Edison is a point that attracts attentioiu__The_£iUuLlii>n in this respect appears to have been "much iniproved h y thr nddi ^ d rnilwMV l-ind/ but is stil l not cer- tainly better than that^ fJlxeUkooklyn lulison, despite the heavy dayliglit load of tlie former comjiany. On the other hand, the latter company has a relatively more important night and early morning load from street lighting. The Flatbush curves are inter- esting representatives of the variation of an almost exclusively lighting load, including a considerable proportion of street light- ing. High develoj)ment of the daylight load is the noteworthy feature of the New Y'ork Edison summer curve. The curves of Diagram II are based upon data for a series of eleven years for a single company, namely, the Commonwealth Edison of Chicago, which has shown a remarkably rapid rate of growth. This gro\\liiJiH'. \mvu Ijrought about largely with direct reference to &^l)taining tiie benefi ts ofJiverTrtrnition. The per cent index cun'es facilitate the comparison oi' results obtained as ordi- nar}- arithmetical curves fail to do. It is hardly necessary to say that the scale is more condensed in Diagram II than in Diagram I, so that the same degree of variation would be represented i)y flatter * TbU diagram i* ali>o to be found, with accotnpaii.vitig diNoushiun and diitii, in the 1913 Annual Keport of tbc New York Public Service Conimiiuiion fur the First Diiitrlct, vol. Ill, p. 72. For pur[io(e« of refcrt'tice in relation to the absolute iiuantltieii reprexented In Dla^am I, the fullovving flifureH of (4 or t> duy) uveiaife 24'hour output in kilowatt houni are given: .New York Kdison. winter. 1011. 1,7U2.183 ; 1913. 2. .'.44. 733 ; Hummer, IB13, 1.081,2^0; Brooklyn Kdioon, winter, 627,H7r> ; kumnier, 876,090; Flatbuidi (iax, winter, 2i.8H3 ; nummcr, 13.370. * The drinaiid of the Tlilrllilay«, and DIairnim 11, average variation for the whole year, obtained, however, by taking every eighth day ln*teud of every day, while tbe data of Diagram III arc for iilnglc day*. Tbe daU of Diagram II are aluo for half hourly, tnKteail of hourly, IntorvalK. •The curvew ore »fjlnt of view of graphic*. Hut thin i« pn-ferred either to aacrincing Uie dUpoal- tlon of tbe Bxe« along an arithmetical scale or to reducing the range of variation indicated by • glVT' f>«»r rrrtt. Interest and iMrouTANCE of Electrical IUtes 21 less appear mure inurkcd.' In Imt fow cities, it in true, would this situation be so highly (Icvelojii'd or aflvancod by IDll as in Chica^^o. It appears that the annual load factor grcatcly improved, hav- ing been raised from 29.3 per cent to -J 3.5.* The difTerence between this comparison and that of diurnal load factors is df)ubtlcss due to the fact tliat the improvement_iu th e variation of demand h:\A been seasonal more than diur nal. In fact the superiority of power IS more'niarked in tlie latter than in the former respect. This point is not suHiciently empliasized in most load-factor discussions, per- haps because load curs'es usually represent merely the diurnal variation. The large influence of the taking-over of the street- railway load by the electrical company is a very important element in the latters improved load factor. Street-railway load factors appear to be in general somewhere around 50 per cent, or at any rate above 40. Diagram HI is on the same general plan as Diagram II and probably fairly represents recent tendencies in the development of the load for large and progressive electrical systems that are in posi- tion to obtain and take care of a good deal of industrial business. It differs from Diagram II in showing data for single days instead of averages for many days. It also relates to the December peak condition instead of to the average for the year. It is therefore not affected by the different character of the curve in summer, as the averages used in Diagram II are. Thus it shows conditions only at the critical time when loads are heavier and peaks greater. The day of maximum output is considered rather more representative of conditions than the day of the highest peak, though, of course, the two are often identical. The general technique of construction and the use of per cent index cur^'es is the same as in Diagram II, but the variation of the load is shown by hourly instead of half-hourly intervals. The axes are arranged according to the scale of the kilowatt-hour output on the December days in question. The result is not essentially differ- ent from what it would be if the axes were arranged according to ' Of. the New York Edison curve for December, 1911, in the diagram on page 17, above. The same company's 1913 cune is much improved by its having meanwhile taken on the Third Avenue street railway sj-stom. ' Chicago Keport, p. 22. In the diagram there shown annual load-factor per cent* arc put alongside arithmetical diurnal curves in a way that conveys a wrong impression. Diagram hi Variation of the Load on December Maximum Output DAYSJ907-I920 Electrical System of a large Eastern Industrial Center AM N 3 O N ; 3 4 5 6 7 fl O 10 II li I I I I I I I I I I I I I EACH 100 X AXIS SEMTS M/ZHAXXi LOAD •^DAY iQid 1920 |9I9 1917 1916 I9l5 1913 PER CENT INDEX CURVES 1914 I0I£ I9ri 1910 Wi Qo'SCAll 'o« AXES 12 I 2 3 4 5 6 7 »J ■:* 10 II 12 I 2 3 4 ^ 6 7 6 9 lO l( l2 A M NOON P M Interest and Tmi-ohtanck of Klkcthical Katks 23 the scale of yearly outputs, and the method used has some advantages. But it is siirnincant iliat the yearly ()ut[)ut has in fact, on the whole, inci'ca.«('(l sonicwhai more since IDT-i (Uk; period for which sur-h data are at hand) than tlir DccciulxT niaxinuini day's output, which fact indicates a <;;ain in evenness of ficasonal di.'-trihution as w(dl as in December daily load factor. This diagram brin<]^s down to date th(^ c((in[)arisons made in previous diagrams. In the character of the devehipmcnt ^hown, even more than in the period covered, these curves doubtless overlap the development at Chicago, because the Chicago company was a pioneer in this kind of expansion. But the company to which the data of Diagram 111 relate has probably made more use of industrial opportunities than some. Indeed, similar possibilities are not open to companies serving the smaller population and industrial centers. It is worth noting that the 1019 curve shows a degree of reaction due to the decline of some war activities. The company does not supply })owcr to tlic local street-railway system, though it does serve one interurban railway of relatively small importance. The marked improvement in the December load curve in the 13 years covered speaks for itself. The daily load factor on the hour- interval basis for the December day used may be computed at 48 in 1907 as compared with 63 in 1913, and 88 in 1920. The greater the industrial demand, also, the earlier in the day comes the peak. The industrial and similar demand accounted for roughly one-half of the total output of the year in 1912 and for two-thirds in 1920. Annual load factors on the hour-interval basis were 45 in 1912 and 56 in 1920. In this connection it is worth mentioning that some of the large hydro-electric plants have achieved load factors above 80 per cent.* Comparable with a 1916 load factor of 43.20 for the great Chicago company are the following figures for certain other urban supply systems: X. Y. Edison and United Electric 38.30 (but the basis is not correct unless the Xew York & Queens Electric L. & P. peak is included) ; Public Service Electric of New Jersey, 39.82 ; Detroit Edison, 47.80; Philadelphia Electric, 35.6; Cleveland " Below is a table showing yearly load faoters in per cent transcribed from the issue of the Electrical World for March 29, 1919, rage 033. The Commonwealth Edison's load factor for 1916 is given a.s 43.20, presumably on a slightly different basis from that used in the previous reference in the text. 24 Electrioal Kates Electric 111;:., •!-'>■«; Kdison of Hoston. ^3.7'^; EdiBon of Hrooklyn, 38.1. The proportion (»f railway load nn»l of power for nmnufao- LOAO rACTOM OF THE LAIIOMT OENClUTINa BTSTBUS IN AMKKICA (Incl«id«t all companlea in the Unft«d .'^UtM and Canada havlnir yrarly outpuU In exoiM of 100,000,000 kilowatt hours; arranged in order of output in 191R.) 1018 Date of Load STRtPin 1919 1017 peak factor Niagara Fallf Power. . 80.04 88.87 Apr. 8 8J 1 Ontario Power 86.80 91.5 Dec. 18 81.9 CommonwcMlth Edison of Cbiongo 43.20 44.0 Dec. 2 43.6 Mont:»na Power 84.r)0 73.0 Nov. 21 Sba\» inepan Water & Power 50.00 60 4 Sept 24 Montreal L. H. * P 70.8 Dec. fl 68.0 N. Y. Kdison 4 United Electric 38.,'?0 39.2 Dec. 11 88.2 Pacific Gas * Electric 02.20 61.6 June 4 88.1 Toronto Power • 68.40 84.0 Dec. 8 81.9 Public Sen ice Electric 39.82 40.2 Dec. 5 48.9 Detroit Edison 47.80 50.4 Dec. 13 61.8 Southern California Edison 56.04 54.4 July 12 54.6 Philadelphia Electric 35.60 40.0 Dec. 6 47.6 DuquMne KIe2.30 54.0 Dec. 6 61.9 Buffalo General Electric » 57.00 52.7 Nov. 22 84.4 MisKiasippi River Power Co 54.30 03.0 Mar. 8 61.8 Cleveland Eleot. I llR 45.80 45.0 Nov. 22 48.88 Utah Power & Light 67.80 72.5 Dec. 27 74.83 Tennessee Power 67.00 73.41 Dec. 11 67.6 Pcnnnylvania Water k Power 61.80 68.6 Feb. . . 84.2 Great Western Power 02.65 71.13 Aug. 12 68.0 Con.sol. G. El. L. & P. of Baltimore 59.10 62.4 Nov. 7 84.9 Puget Sound Tract. L. & P 61.80 64.0 Dec. 20 65.4 Consumers Power Co 46.0 Nov. 21 46.8 Elec. Co. of Mo. & Union Elec. L. & Pr 43.10 4C.fi Nov. 26 49.1 AUbama Pr 51.07 56.7 Dec. 19 51.5 Winconsin Edison and Milwaukee El. Ry. & Lt 39.00 44.0 Nov. 20 43.0 New England Power 44.00 48.0 Dec- 18 <8.0 Mlni.eapoUs General Electric 44.90 46.16 Nov. 1 53.8 Ediwn Elect. Illg. of Boston 33.72 StJ.l Dec. 6 86.0 Brooklyn Edison .3H10 37.5 Dec. 11 37.5 Portland Ry. L. ft P .4»t.:.0 49.0 Dec. 23 62.0 Sierra ft San Franrihco Pr 49.44 J"'y 1« '^'•' Georgia By. ft Power Nov. 8 Michigan Northom Power 74.40 76.7 Dec. 24 79.4 Rorhe«ter Ry. ft Lt 4100 44.0 Nov. 22 42 8 Washington Water Power 00. 80 58.5 Nov. 20 6r..l Great Northern Power .4HS0 51.5 <* ' Adirondack Electric Power . .4140 43.1 ")^ Nov. 8 ft 39.6 J Jan. 23 Potomac Elect. Power :;(i lo an o.i ivc 20 410 Virginia Ry ft Power 4 4 .'.4 47 39 l)rc. 18 .'.2 8 Southern Sirrraa Pr. ft NevadaCallfoniia Power 06 50 66.3 Aug. 6 65.8 TolHo By. ft Lt 42.20 40.4 Drc. 4 45.7 Southwestern Pr. ft Lt 43 00 46.0 Srpt 26 44.6 Empire Dl'tlrirt Elrri. 49.70 62.4 Srpt. 6 514 8otith«m Power ... .... .... ■ . • • Interest and Imi'outanck of Electrical RAT^:8 25 turing has most to do with the difrerencos. A coniijuny witli a large proportion of hydraulic prime-movers, also, will usually have rates that especially encouraf^e industrial and off -peak uses and will he likely to have a corrosj)ondingly high load factor. It should be noted that in tlie three diagrams above presented the peaks and depressions are snioothod-out somewhat by the char- acter of the data (average kilowatts for considerable intervals) and the method of construction (oblique straight lines between the average points). On the other hand, the deleterious elTects of an overload upon generators, etc., are not immediate, hence a time- lag in the response of the curves to changes in the load is not inap- propriate. As will appear in the following chapters, the load factor is essentially an economic rather than a technological matter. The output of an electrical company is obviously determined by the needs and wishes of its consimiers. Its maximum output is also determined by its consumers. It is the business of the company to be ready with the supply when it is wanted. If an electrical company seeks to increase its load factor, it must operate through the motives and habits of actual and possible consumers, in other words, not through internal organization and management, but through selling policies and rate schedules." It is worth noting that the date of the maximum within the jear has an effect upon the computed load factor in the case of a rapidly growing company. Allowance for this can be made, wl>en data for successive years are at hand, by reducing the maximum (or increasing It, if it occurs near the beginning of the year) in the ratio of the elapsed time after the middle of the year to the time (approximately one year) between the two maxima respec- tively within or closest to the year for which the average kilowatt hours are taken. *' Too exclusive attention to diurnal variation is doubtless responsible for a misapplica- tion of load-factor principles in connection with gas rates. Where the gas holders will contain nearly or approximately one day's supply, which is the usual situation, it is obvious that the operations of the company are but little affected by the time of day when most gas is consumed, er whether 10 per cent or 30 per cent of the day's consumption is taken between 6 and 7 P. M. The seasonal \ariation, on the other hand, as between the highest and the lowest monthly average per day, will be decisive in determining the necessary investment in production plant. Hence, if gas companies were to adopt load-factor rates, the reference should be to the seasonal, not to the diurnal, variation, and the maximum demand should be determined by the greatest average use per hour during a day or even longer period. But load factor principles have been applied by the Consolidated Ga.s Electric Light & Power Co. of Baltimore in its gas rates for industrial uses (Hopkinson tj-p*^) on the basis of the greatest number of cubic feet usrd in any one hour (C Rate Research 372), and for domestic use (Wright type) on the room basis. The latter is practically a density-factor rate. For the first class the rate is further qualified with reference to diversity as follows: "For installations in which the use of gas is considerably less between the hours of a P. M. and 7 P. M., during the period from October 1st to the succeeding March 1st, in eaeh year, than at otlier times, the specified demand upon which the rate is ba.sed may be taken u 2rt Elkctimcai, ir^TKS Further Matters of Economic Technology The central-station industry is or nhoulii i)i' an object of study cspociall}* intorcstinjj to those who are concoriiod witii technologi- cal economics, not only because of the load factor, but also because of the unusual importance in this connection of the so-called principle of " increasing returns," othenvise referred to as " the economy of large-scale production," " the density factor," etc. The highly capitalistic character of electricity supply has already been mentioned. The fixed investment per unit of service and per eniplovee is probably not exceeded in any important branch of indus- try. It suffices for present purposes to make the statement thus qualifiedly, and it is not possible to do much better. The fixed- capital accounts of large and successful enterprises arc not of so determinate significance as to make comparisons on that ba.sis certainly worth while, and satisfactory " physical " valuations for various classes of corporations are not as yet comprehensive enough to afTord the facilities for an adequate statistical study by such means. The significance of the great proportion of fixed capital cost in the total cost of electricity supply will appear in various connections in the succeeding chapters. the measured rate of vse occurring during any hour between the said hour* in the «ald winter months; provided that the demand shall in no event be taken as Iom than one-half of the maximum measured rate of use at any other time, the use under such condition* btiug cLissed as non-peak." (Schedule K, describing the rates referred to, is printed In full In the Hej><>rt of the Differential Rates Committee of the National Comint-rcial (.i.m .\fc.ociatlon for 1917.) It hhould be noted that the demand is specified in the contract, subject to revision upon mea.'-urement. Moreover, the company may at its option give permliwlon to exceed the determined maximum rate of use. It is probable that the Intent of such ratei is concerned with the density factor at least as much as with the load-factor, and the effect may be substantially that of quantity-block discount* The schedule In question xtu accepted by the Maryland Commission. A gas rate accepteer unit of output, moilined by quantity dlwxiunU, I* tho one generally Indicated. The heavy loading of a gas plant depends more upon quantity Uken than upon time of day. One might, reasoning fmm this one ground, rr,n kva. and Per cent larger Kva. of total units Buffalo General Electric 38,889 30.8 100.0 Consolidated Oa.s Elec. L. k P. (Baltimore) 20,000 24.5 4B.1 Boston Elevated Railway 35,000 28.5 28.5 Edison Elec. Illg. (Boston) 30,000 21.0 21.0 Alabama Pr. (Birmingham) 33,333 23.1 41.6 Edison Elec. Illg. (Brooklyn) 30,000 24.7 42.8 Brooklyn Rapid Transit 30,000 21.5 30.6 Commonwealth Edison (Chicago) 35,300 7.1 45.7 Cleveland Elec. Illg 31,250 15.0 72.1 Union Gas & Elec. (Cincinimti) 25,000 29.0 59.3 Northern Ohio Traction (Cuyahoga Falls) 22,222 33.2 66.3 Detroit Edison 45,000 23.3 54.4 Pennsylvania R. R. (Long Island City) 21,100 27.1 52.7 Twin City Rapid Transit (Minneapolis) 20,000 30.8 30.8 Moliue Rock Is. Mfg 20,000 39.6 39.6 Interborough Rapid Transit (New York City) .. .70,000 18.0 65.8 New York Edi.son 30,000 10.5 38.8 Public Service Elec. (Newark) 35,000 13.2 39.6 United Elec. Lt. & Power (New York City) 25,900 20.7 52.8 Philadelphia Elec 35,000 12.5 55.0 Narragansett Elec. Ltg. (Providence) 47,500 55.5 78.9 Duque.sne Lt. (Pitt.sburgh) 47,200 28.1 28.1 N. Y. Central R. R. (Port Morris & Yonkers) . . .20,000 33.3 33.3 Reading Transit & Lt 25,000 100.0 100.0 Union Elec. Lt. k Power (St. Louis) 25,000 30.1 30.1 United Elec. (Springfield, Mass.) 20,000 44.4 44.4 Toledo Ry. & Lt 23,500 26.7 52.0 Worcester Elec. Lt 20,000 46.5 46.5 Wheeling Elec. (Windsor, W. Va.) 30,000 43.5 87.0 The ratios show the extent to which reliance is placed on a single machine. To the above list should be added, as having generators of 30,000 kilowatti or more in place or ordered by the end of 1920, the Niagara Falls Power Co., the Hydroelectric Com- mission of Ontario, the Pacific Gas and Electric, and probably others. Moreover, further large machines have been ordered by a number of the companies above listed. In an article in the Electrical World for Jan. 17, 1920, page 132, Mr. F. D. Newberry, of the Westinghouse Electric and Manufacturing Co., sums up the dc^•elopment of large gene- rating units as follows: Before 1912 the largest unit was of 8000 kilowatts capacity. In the five years 1914-1918 units of 20,000, 25,000, and 30,000 kilowatts became a5 common as units of 5000 and 10,000 kilowatts had been during the preceding five years. In the last two years tliere has been a noticeable slowing up in the increase in the size of units. Few single-shaft units larger than 30,000 kilowatts have been purchased. 3 28 Elkcthkal Hatics capnrity of 100 kilowatts; and in 1S!)8 the largest generator built or building was of UJOO kilowatt?." In contrast with the stations of several hundred thousand kilowatts capacity, there are now in operation, at the other extreme, numerous small stations with generators of 100 kilowatts and less. The economic significance of the above comparisons depends upon the relation of cost of energy to the si/.c of the generator. In a recent scientific discussion of this subject," a general rule as regards original cost of apparatus has hern formulated as follows: " If the speed remains constant the cost per kilowatt will decrease by approximately 65 per cent for an increase of 10-fold in the size of the unit." As to operation, the same authority says, " Operat- ing costs increase with decrease in size much faster than do fixed charges." " We arc not here concerned with the scientific exact- ness or the extent of applicability of such a formula. Even if rather rough, it senses emphatically to point the moral of the great importance of large-scale production in the electrical indus- try'. It should be noted, moreover, that it is not safe to depend upon a single generator for too large a fraction of the totiil demand, hence large generators are not available for the small stations so much as may appear." Comparison of the capacity of such large- size generators as those above mentioned with that of various classes of power plants are interesting in this connection. The Wisconsin Commission " publishes statistical data as of 1916 for 185 central-stations enterprises. The largest one has a capacity of 44,030 kilowatts; the next largest 15,500 kilowatts; 6 others have capacities of more than 5000 kilowatts; 18 have capacities of as much as 1000 but not as much as 5000. Of the remaining 159 stations only 17 have 500 kilowatt* or more capacity. " Paul M. Linc)ln in Proiidential Addreas, 1015. A. I. E. E. Proceedingii. page 1485. Cf. aUo th« d'-vtlopment In irtzes of generator unit* for the Commonwealth Kdlnon Co., of Chicago, aa rejKirtrd by Mr. Insull in the Journal of the .\mcrl<-an Society of M<'<-hanir«l Knglnecra, .Nov. 10, 1010, page 847: In 1887, 100 kw. ; In 1002, SiOO ; In 1003, 6000; In IttlS, S.'i.OOO. The Commonwealth Edison waa a pioneer In thla de\'elopmcnt, but has lately been surpassed by others. " Paul M. Lincoln, Helatlon of plant sUc to power co*t. 1013 A. 1. E. E. Proceeding*, page 1030. " Page 1041. " Dlfllcultles U> be met In Intnwtlng one fourth of the loiui to a slngl* machine are dls- russed In the report of the 1010 N. E. L. A. C.ommltf<-e on Prime Movrra. Compiire this with the ratio* of the Mw-ond r-ojumn of the table In the footnote nl pace 27. above •* T'-nth Annual Report of the Railroad CV>mmlwlon of Wi/<:onhln (year ended .June 30, 1010), page* 676, 6R5, 508, 508-001, 000 000. Interkst and I \ii'()in'ANf"E 01' ?'lectrical Hatp:.s 20 Tho Xeu' Y'ork Second District ("oniinissioii, which ha.s juris- diction outside New York City," puhlishos data including station capacity for 122 central station enterprises. Of this total 12 have capacities of 5000 kilowatts but less than 20,000 ; and 9 have capaci- ties of 20,000 or more. Of the remaining 101, 40 have capacities under 500, IS from 500 to 999, and 37 from 1000 to 4999. In Illinois, where combination should be expected to have more effect on the size of electric power plants than in most states, of 100 public-utility plants reporting in 1916," 59 iiad a " maxi- mum " capacity of less than 500 kilowatts and SI others had a capacity of less than 10,000, leaving 7 of larger capacities. It is evident that, from an engineering viewpoint, most elec- trical plants operated as central stations, or performing a public service, arc small plants, comparable with isolated plants as to conditions and methods of operation rather than with the big alternating-current generating stations that send electricity over miles of high-tension cables to numerous substations from which, through the distribution system, consumers are supplied. The tendency to centralization in electricity supply means the dis- placement of small generating plants by more or less distant sources of supply. Whether the small plants are operating as central stations Avith a small distribution system supplying their immediate neighborhood is not of much technological significance. How far the process of centralization may go depends, of course, upon the economies of large-scale " production " — which are con- spicuous in the case of electric generation — and upon the cost of transmission. As to the latter cost, whatever it may be absolutely, the possibilities of meeting it depend upon dcnsHy of demand. In considering large-scale production, it is necessary to have clear ideas as to the signijScance of " density." In general, the greater the amount of productive capacity, of both capital and labor, that can be applied economically at a given place, with concentration of management and unity of organization, the smal- ler will be the unit cost for the resulting enlarged output. This fact is obviously true for manufactures generally and is commonly "Atuiual Report for 1917 (year ended December 31), vol. IV, pages 66, 126, 181, 200, 218. " niinois Public Utilities Commission Statistical Report for the year ended June 80. 1016, page 795 S. 30 Elkctiikal Katics referred to as the " ntlvnntnge of lar^c scale production." It is true for the railroads, where it is referred to as tlio tendency to " increasing returns," that is, increasing profits under the same rates, resulting from the growth of traffic on a given line. In this case, since tlie service cannot he disconnected from the plant and sent to the consumers, trallic must grow up adjacent to the plant in order that density may develop. The situation as regards electricity supply is similar to tlie second case in that the service has to he rendered in connection with the distrihution system. As regards the size of the electric power plant, on the other hand, the situation resembles that of a manufacturing enterprise, but the electrical power-maker must supply his own " transportation " system. The relation between the load factor and the density factor has been discussed by the writer in another connection." Since the capacity of generators and otlier electrical equipment plays so large a part in the economics of electrical enterprises, it is worth while in this connection to devote a few words to the sub- ject of rating. Standard rating is "continuous rating,'' that is, rating according to potentiality for steady and uninterrupted out- put at highest efficiency for an indefinite period. In general it is the decline of efficiency, occurring when the capacity of a machine is forced, that limits the rating. For electrical apparatus, how- ever, the tendency to an injurious rise of temperature is the limit- ing factor. But if the excess load is only momentary or is not continued for a considerable time, any temperature rise, which is by nature cumulative, is soon counteracti'd and no harm results. In other words, an electric generator ordinarily has considerable overload capacity. This fact has an important bearing on the sig- nificance of the load factor. The peak that is of fundamental tech- nological and economic significance is the highest average demand for an interval of time, perhaps 30 minutes, or more or less, not the highest instantaneous demand. It is commonly the pnictice of manufacturers of electrical equipment to guarantee certain overload capacities for limited periods under specified conditions. If the relation of the overload capacity to the continuous rating of a generator varies, the economic significance of the latter is ••Article In the Amcrlran Ecoiiomlo Review for nrrpml>cr, lOlfi, mtltlefl, A Third K«rtor In the VarUtion of Productivity: TJvi Load Factor, page 7.'.8, nri>cclBll.v the flrrt Met Ion. Interest and Importanck ok Electuical Rati-:s .''1 evidently subject to some qualificiitioii. It is possible llmt recent develo{)ment8 in the construction of large generator units tend to cause the absorption of some former ovcrlcad capacity in the continuous rating. The newer turbo-units are built with refer- ence to easy ventilation and rapid cooling. The continuous rating thus in efTect absorbs some of what would otherwise be overload capacity and the relative overload capacity is correspondingly re- duced. In the case of a company with quickly rising and receding peak demands, it may therefore be necessary to have a larger reserve capacity. On the other hand, the elasticity of the carry- ing capacity of turbo-units and the development of devices for the rapid raising of steam on demand ought to mean greater facility in dealing with peaks, such as might make it possible to dispense with some of the reserve capacity formerly needed to meet such demands. In one way this increased operating elasticity of generators — the fact that their efficiency does not vary -greatly within a wide range of loading — tends to put the moderate-sized central station more nearly on an equality with the large one, since fewer and larger generators can be used if it is less necessary to provide for varying the capacity in use by switching in or out additional machines. In the matter of reserve capacity, an elec- trical company often finds it economical to keep in operating con- dition for standby and supplementary service some of its obsolete and othcn^ise superseded equipment. Where certain machines are required to be used only 90 hours a year, a very low degree of operating efficiency can easily be counterbalanced by the increase in fixed charges for up-to-date equipment. It is said that American plants tend to utilize overload capacity in dealing with peak demands to an extent unknown in foreign practice. But the fact may rather be that American manufac- turers of generators have in the past been inclined sometimes in effect to increase the overload capacity by understating the regular rating. It appears, at any rate, that the standard American rating practice would ordinarily assign to a generator a somewhat lower rating than European standards. This general situation serves to remind one that it is not merely in the field of the social sciences that basic statistical quantities are approximate rather than exact. A. C. turbo-units are most accurately rated in kilovolt amperes. Not only is this unit somewhat different from the kilowatt, but its 32 Electrical Kates relation to the latter is somcwiuit variuhle. The nature of the ditToronoo is indicated in the definition of the power factor given above." What the matter amounts to practically may best In? illus- trated to the non-technical reader hy way of a somewhat stretched analogy with the conditions of wat^'r distribution. If the utiliza- tion of water from a system of mains required that the water be kept in motion past a given point of consumption at about a given rate, then the water would be distributed through " circuits " pro- viding for a return current to the central source of sup]ily. And if only a certain percentage (say 80 per cent) of the water coming to the service pipe of a consumer could be obtained by him, then the amount of water kept circulating through tlie distribution sys- tem would have to be one-fourth greater than would be necessar}' if the consumer could t^ke 100 per cent. Pipes and pumps would also have to be correspondingly greater. This is about the situa- tion when the power factor enters into consideration in electrical supply. Generators and oilier apparatus have to be larger (in the ratio to the power factor of its complement) tluin would otherwise be necessar}\ That is, for a power factor of 80, equipment must be of 20/80ths, or one-fourth, greater capacity than for a 100 per cent power factor. The power factor relates to alternating-current equipment and the figure varies according to whether machines are under light load or full load." There appears to be a substantial consensus of opinion among central station men that the power factor is not a rate problem, though an e.xtra charge or penalty for a power factor below 80 is considered a suitable means of regulating the installations and practices of consumers. A considerable number of companies have recently specified in their power rates a standard power factor and included a scale of surcharges for low power factors." There are various differences between alternating-current and direct-current distributing systems that are of much economic as well as technological importance. The use of the one or the other system in a particular district is due to historical developments as • Note on pafje 13. " Methrxli of mraiuring Uie power ftrtor, or eKtlmatlng It, for u»e m a mte element, ar* dliru««-,642 2, 70!), 225 5.862.277 1912 302.273 5.165,439 11,569,110 10-ycar per cent iiicrea^ie 2.'>2.7 S26.1 361. S 1917 526,894 8,994,407 25,438,303 10-year per cent iucaasc 200.0 iSZ.O SSS.9 The rate of growth and the present magnitude of the central- station industrj' speak for themselves. But these ligures relate only to electricity supply as a separate public-service enterprise. To the output for 1017 above given may be added 7,'MO,50:^ thou- sands of kilowatt hours for energy generated by the power plants of electric railways and 561,784 thousands for electrified divisions of steam roads, etc.,** for which the economic technology of the genera- tion and use of electric current is much the same as for central stations. Indeed there is a tendency towards the operation of traction systems with central-station power, which thus makes the terms and conditions of their supply a part of the electrical rate problem. There remains the numerous private or isolated plants in factories, oflice buildings, etc., similarly to bo considered in this connection. The aggregate output of such plants is of course unknown, but it appears to be comparable in magnitude to the central-station product." "Central EIrctric Mght and Power HUtionii and Street and Electric Kailwiirf, 1913 (publU)tcd, IBIC), p 20, Table 5; Central Electric Light and Power Station*, 1017, p. 23, Table 8. »• Page 88, Table 31, of the Coiuiua of Electrical Induitrlen, 1917: Electric Rnllway*. ■Cf. p. 1C8 a., below. Interest and Imi'outanck of I-Ilkci imc \i, I.'atks 35 The growth of tho hydro-electric element iji the total capacity of central stations is of no less ])ermancnt economic importance, though of comparatively incidental interest in the present connec- tion. This devclopmont involves correspond in^^ progress in the technique of electrical transmission. Measured on the ha-sis of output the importance of water power in comparison with other sources would he shown considerable greater. Morse power of prime moverB— / « V Otlur than Year hydroelectric Hydroelectric Total 1802 1.400.-176 438.472 1.845,048 1907 2,749,101 1,349,087 4,098,188 1912 .5,060,813 2,409.231 7,530.044 1917 8,659,482 4.277,273 12,930,755 At to the comparative rate of growth of the electric supply industry, it is hardly necessary to say that no other class of public utilities and practically no other branch of industry shows for the available 10-year comparison a comparable relative increase. Eailroad freight car mileage, which happens to be the available index that can be carried back most satisfactorily from a recent date, increased from 14,194 millions in 1903 to 21,035 millions in 1913, or 48 per cent for the decade."' The greatest rates of increase shown by any of the most impor- tant branches of manufacture in the United States for the decade 1904-1914 were for automobiles with a 1788 per cent increase in the value of products and automobile bodies and parts with a 3724 per cent increase. Industries or groups with value of products exceeding $100,000,000 in 1914 numbered 56. Electri- cal machinery, apparatus and supplies, with a 138 per cent increase, is conspicuous among these. Indeed, besides automobiles and automobile parts, only food products (259 per cent), rubber goods (255 per cent), cement (240 per cent) and fertilizers (171 per cent) exceed it. For all industries the 10-year increase in the value of products was 64 per cent. These ratios are comparable with a 10-year increase for central stations of 253 per cent in " income '* and 361 per cent in output. The direct comparison of value of products as between the various branches of manufacture and elec- tricity supply is hardly fair to the latter, however, because electrical "* Interstate Commerce Commission: Statistics of Railwava in the United States, 1913, p. 46. 36 Elixtuical lUxiia rates have been j^oinp: down tlocidedly while the census doi-nde was one of a very considerable rise in prices for most products. It is safe to say that electricity supply has had a rate of growth that puts it in a class by itself among important industries, with the one exception indicated." Such comparisons of rates of increase need to be supplemented by comparisons of absolute magnitudes. The total earnings of central stations in the Ignited States in 1912 (calendar year) were 302 million dollars and in 1917, 527 million. In l!)i;j (fiscal year) the railroads of the country earned 3125 million dollars," or ten times as much. But in 1888, the year of the first statistical report of the Interstate Commerce Commission, the railroads earned only 911 million dollars." At that date they had back of them twice the length of years electricity supply had in 1912. As to comparative valuation of property, the latest available C^nited States Census data" show estimates as of 1912 of 16,119 million dollars for railroads and their equipment and 2099 million dollars for privately owned central electric light and jwwer stations. The comparison of income and output as sho^\^l above at page 34 gives the following averages per kilowatt hour: In 1902, 3.52 cents; 1907, 3.00; 1912, 2.61; 1917, 2.07. These results are not good average prices, since doubtless something besides revenues from sales is included in income and the output figures include duplication from inter-company sales as well as losses. But it is a fair conclusion that average prices declined by more than one- fourth between 1902 and 1912 and by nearly one-third between 1907 and 1917. ^faximum prices available to small consumers may have declined nearly as much. The results indicate at least the strongly dynamic condition of the industry. As to costs of construction and equipment — which are now sub- ject to large allowance for price changes afTecting metals especially, due to the War — it appears that generators cost 20 cents per watt in 1882, 2 centi? per watt in 1898, and less than A a cent in 1915." " DaU from Abrtract of Uic Ccrucua of Manufncturt-i, 1»M, pag«* 20 7. " SUtUtica of KalluavR, 1IM8, p. 48. * HUtUtic-a of Railwa.v*. IHNH. p. 17. ■* U. H. Durpaii uf the CVnouii : Kalmatnl Valuation of Natlorml Wpalth, IHOOIBIS (dated Ittl.'.), Table 2. p. 15. " Paul M. Lincoln, in l(«i:i, A. I. K. K. I'mceedlnga, pogi' 1400. Interest and iMPoiiTANrE of KLErTHirAL Rates :J7 The Problem Confronting Regulating Bodies The proseiit work deals with the economics of rate-njaking, not with the legal and administrative aspects of the problem. When the decision or opinion in a case before a court or a commission is here cited, it is not with reference to establishing a legal rule, nor to forecasting an administrative policy. The legal situation should progressively conform to the requirements of economic fact and principle. But the existing and prospective relations between these two orders of phenomena are not of primary economic interest. However, what the attitude of regulating bodies is will be indi- cated as occasion arises. Commissions with undoubted power to regulate electrical rates have now been at work in the states of New York and Wisconsin for more than a decade and in numerous other states for shorter periods. Still it can hardly be claimed that there has developed a clear-cut body of commission opinion on this subject. The statement needs qualification with reference to the Wisconsin commission, which has contributed its share;" but the creation of such a body of quasi-legal principles and applications as is referred to implies a convergence of judgments and precedents from a variety of sources or states. In fact few commissions have even followed the leadership afforded by Wisconsin. This situa- tion is perhaps partly due to doubt as to the possession of adequate powers, but more fundamentally to the diffidence of commissioners when confronted with a subject so complex, both theoretically and practically, as that of electrical rates." " The writer commented on certain leading opinions of the Wisconsin Commission in a note in the Quarterly Journal of Economics, Fcbruarj-, 1913. The Commission accords full recognition to the load factor though unduly inclined to assume that differentials thus devised correspond to separable costs. The law of Wisconsin is unusually specific and adequate in this respect in its grant of powers, as appears in the following extract (National Civic Federation's compilation of public-utility laws, 1913, p. 249) : " Commission shall provide for a comprehensive classification of ser\ice for each public utility and such cla.ssification may take into account the quantity used, the time when used, the purpose for which used, and any other reasonable consideration. Each public utility is required to conform iU schedules of rates, tolls and charges to such classification." "The conservatism of the Massachusetts commission is illustrated by the following quo- tations from its opinion in tlie case of the Edison Electric Illuminating Company of Boston, Mass. Board of Gas and Elect. Lt. Commissioners. 24th An. Rpt (1908): "Unless a cus- tomer can seriously consider generating his own electricity, the value to him of each kilowatt hour furnished by the company has no necessary relation either to demand, quantity or length o' use If all the customers of the company were dependent on it for a supply, it is believed that there would be little occasion to discuss or attempt to ju.stify differential rates, and that a uniform meter rate, determined by reasonable operating costa and a fair return on the investment reasonably necesaarj- for the public convenience, would prevail ±92299 88 Elkctrical Rates The various puhlic-sorvice comniission laws t'xplii-ity confer the power to fix at least maximum rates. It is also the unquestionaltle duty of such commissions to prevent " unjust " discrimination. As to princij)les of difTerentiation the laws are naturally silent, though the power to j>rescril)e classifications (one mode of dilTer- entiation) is sometimes definitely conferred. But it would seem to he unnecessary to confer express powers in relation to ditferentiation. The power to prevent discrimination is the power to fix the limits of differentiation and to determine what sorts of differential rates are permissible. What are " sub- stantially similar circumstances and conditions'' from the view- point of economies, with regard to the company's affording maxi- mum service to the public at a minimum unit cost, is the gist of the matter. If there is any advantage in differentiating, it is to be presumed that a company will utilize to the full the opportuni- ties left open to it. If the commission has not the power to fix and prescribe every detail of a rate schedule, that situation may sometimes involve administrative inconvenience. But even if com- missions deal only with principles, leaving business details to be worked out by the companies concerned, they should be able in the long run to control and determine the modes of differentiation. For example, a commission could proliibit plain wholesale or quan- tity discounts exceeding a certain range per kilowatt hour as dis- criminatory, and thus compel the electrical companies to find other and more reai^onable methods of reaching the large consumers — whether by load-factor rates or density-factor discounts — tliat are less open to the suspicion of being mere concessions to bargaining power. The commissions have ample power to deal with this (pies- tion, but they have not fully exercised it. The power to determine what shall not be done is in such cases a sulTuicnt, and perhaps the surest, way to find out what is best to do. It is unnecessary, and it would be ungracious, to establish by citation of page and line the point that commissions have been diffident in dealing with electrical rates. Opportunities to deal comprehensively with the subject have not been so very numerous. unlvenally. It mmjr be conceded that, If a uniform rate prevailed, there would be ioine un- prnfltaljlr (.nutoineni " (pp. 43-44). The Idia rniphu)il7.p' and demand charges most important. The energy or kilnipatt-hoin charge. Three initial qvialifiors. Gradua- tion according to quantity con.sumcd. The step method of size classifica- tion. The block method of variation. The latter differs from ordinary wholcs;ile price making. Former more familiar to tlie public; needs limit- ing provisos. The .so-called straight-line meter rate. The (i( mand ehorgc. The definition of demand. Not to be merely iden- tified with the consumer's individual maximum. His requirement at the time of the s>'stem peak most important. The Hopkinson rate — two charges. The most general type of load-factor rate for large consumers. The Wright type of rate. Common for .small consumers, the demand being generally estimated. Difference from Hopkin.'^on rate well illus- trated by curves. The Kapp rate. Load-factor rates defined. The determination of mnTima and of the conjonnation of the consumer's load curve. The technical situation as regards demand metering. Esti- mated "active connected load" as a .substitute for the actual maximum. "Convenience" lighting. Room and floor area bases. All thc^e methods applied in conjunction with Wright rates. Considerable arbitrarines:*. Element of averaging in dr'tirmining the maximum. In effect a discoimling of the individual maximum for divei>'ity. Bearing of overload capacity on the proper interval for which to take the maximum. Meter develop- ment in relation to existing practices. A public interest involved in load records for largo consimiers. Variety of sub.s-titutes for maximum metering. Flat, brrakdou-n. and off-peak rates. Brief characterization of each. Definition of the flat rate. Small cost of watt-hour metering makes the flat rate chiefly of hi.storical importance. Revival for high-etriciency light- ing and for limited demands. Breakdown and auxiliary ser\-ice for isolated plants chiefly a matter of insurance. The guaranty feature of some rates. Off-peak rates an important application of load factor prmciples, though of limiteunu rs pre- pared to take high-tension current in large quantities, themselves transforming it with their own apparatus on their own premises. A high-tetiswn rate — or priman/ rate, as more generally named — is naturally lower even than the low-tension wholesale rate, the energ}' being in this case, so to speak, the crude or incompletely manufactured product. The breakdown rate is something entirely dilfcrcnt in nature from any of those above-mentioned, having to do chiefly with the insurance of private plants against entire stoppage of the supply of electric energy in case of accident. Hence it is usually char- acterized by a heavy demand charge. There are various other rates of less importance, and somewhat special in their nature, based upon peculiarities in the business of one or another class of consumers. These, however, consist of rather slight modifications and new combinations of the rate ele- ments presently to be mentioned and involve a concession to some particular use of electricity — such as for signs, storage batteries, and refrigeration — or to some occupational class of consumer. It should be added that, where a consumer may be eligible for more than one rate, it is the prevailing, and the only reasonable, prac- tice, to give him the most favorable one open to him. By rate elements are here meant the arithmetical factors by which the actual siggregate amount charged a given consumer is computed. Rate classification is a different matter, though the rate elements are often made to subserve the same purpose. Rates are high or low, or (more generally stated) vary in one direction or another, according to the way in which the rate elements are apjjlicd. Sometimes it is convenient to name a class rate by the method of its computation. This should not obscure the fact that the distinctiveness of a rate curve, or of the variation of the charge, is one thing, and the arithmetical methods by which a particular cune is obtained are something (piite difTcrent. These various rate elements are: Kilowatt hours supplied; time of conHum{)tion ; " senieo," or the mere fact of being a consumer; " demand " in a somewhat special sense, or maximum demand, Typks a\i» r'l.KM i:\rs oi' I'.i i:ci kit ai, IIatms 43 referring to kilowuUs of gc'iioralin;,^ and (liotril>uliiig capacity needed to meet the largest requirements of the ooiiHumer; con- nected load, as a working suhstitute for individual demand not actually determined ; meter or number of meters used, perhaps with some degree of graduation according to the size of the meter. The ways in which these factors are used and combined vary greatly, and sometimes the elements appear under names not above mentioned. The most important difference among the rate elements is that between kilowatt-hour, or energy, charges, and demand charges. This di (Terence is closely related to the distinction the economist makes between " variable " and " fixed costs." But the emer- gence of demand charges as separate elements in electrical rate schedules is due to causes characteristic of electric supply, rather than to the very general distinction between necessary running expenses and expenditures for carrying and maintaining capital. The Energy or Kilowatt-Hour Charge The fundamental rate element is the kilowatt hour. Indeed the charge may be computed entirely on the basis of kilowatt hours consumed. If there is an unchanging rate of (say) ten cents per kilowatt hour without qualification, the result is a straight kilo- watt-hour rate, or a straight-line meter rate. But the rate may be qualified as regards initial consumption and there may be quantity discounts available for large consumers. The initial price may be raised by a meter or a consumer (or "service") charge; or by the collection of a minimum amount billed whether the consumer takes energy enough to owe this amount at the usual rate or not. This subject is dealt with in a later section. The effect of both of these qualifiers upon the charge per kilowatt hour for initial and small amounts of electric- ity is best shown by way of curves. The accompanying Figure 1 explains itself. The variation of cost on account of the small con- sumer may without hesitation, merely on general grounds, be affirmed to conform more nearly to the type of rate curve when there is a consumer or meter charge than to either of the other two shown in connection with it. 44 Klkctricai- Kates The kilowatt-hour cliarge schloin remains level at the rate avail- al)le to tlic pninll consumer. It is grnduated, pn'sunial)ly for each rate claiv*;, according to quantity consumed. The lowering of the rate where large quantities are t^iken may be clTected by simply cla^Jsifying consumers by size, that is, accord- ing to volume of consumption per year or per month. This means that, for example, a con.sumer taking 250 kilowatt hours a month a A V ■9 E « R n A 16 G 15 E M t1 C 12 T II s 10 9 P E f» K -; n An 1 D — — 1 r-\ rn 1 — 1 1 nn I 1 Fig. 1 nil" \ \ AVERAGE RATE CURVES \ INITIAL AND SMALL CONSUMPTION | 1 — ^ \ V 1 \ \ \ 1 \N 1 * \, 1 > V X jm I ^ ■«>», "iM >^ .1. A A 1 ■""i "' — - ar -- T I I 1 1 r 1 1 > 1 1 1 1 1 1 I 1 1 . I. STRAIGHT METER RATE OF ID CENTS PER KW. HR n. SAME BUT WITH $ 100 MINIMUM MONTHLY BILL m .RATE 6i CENTS PER KW. HR. PLUS A CONSUMER CHARGE OF 50 CENTS PER MONTH 1 1 1 1 1 1 1 1 1 1 1 1 1 , Kl LO|W Z J .4 kTfr z_ H OU R S « Kl 17 P H ER a— l« 5_ M ON • TM » V a_ n '1 will pay a nine cent rate on all his consumption, where one taking only 10 kilowatt hours will pay ten cents. This is the step prin(i[)le of graduation.' A much better way to graduat<> the kilowatt-hour rate is to retain the original rate on a fi.xcd initial block, decrease the rate on the next additional block of a prescribed quantity, compute at a bit less a third additional quantity, and so on, as the size of the ' Accoriling to the t«rtiilii»llnKii, 1U12. vol. 1. p. 1«9. An exrellrnt dcflnltlon from the 1917 .N. K. L. A. Rntc Bwk (p. 0) U an follown: " The lenn ' utrp ' liidlrafe« that a r«>rlalri xp^vlflefj prire t>rr unit In rharurd for the entire ron«umptl<>n, Uie rate dependlnif on the particular step within which the total conaumption falla." Types and Ei.emknth of Eleotkical Rates 45 consumer increases. The comparison between these two modes of scaling do^v^l the rato as tlie quantity of energy consumed increases is best sh«wn graphically as in the ac(omi)anying Figure 2, where the average rate curve resulting from a " block " * scheme is com- pared with, the corresponding blocks and also with steps that would appear to give something like the same general efTect. The nature of the block method is effectively as well as curi- ously illustrated in the so-called "one-cent sale," by which the II E - 1 Fifl.^ BLOCKandSTEP gUANTITY UlSCOUNTiJ 1 \ ' AND Kt-JjUU intJ MVCKMUC rtMICO > , 1 1 s 7 I' R5 •••. '•--.... ****'*•• ^ H2 B.I HI ncKS R' riCM avpR rai rES FREE ZONE CUT 1 1 nPF — Site's 1 1 I K 1 LOW ATT IV) ISOO HOiuRS PElR II^ONTIH 750 llOOO 1250 !l500 11700 I'OOO »50 Hj-potbetical data of Fi(^res 2 and 3. Quantity Block Rate Rates per month per kilowatt hour. Step Rate (by coitstimcr size-cUisses) Up to 2.0O 10 cents Less than 250 10 cents 251- 500 9 From 250 to 7nO 9 " 501- 750 8 750 " 1250 8 " 751-1000 7 1250 " 2000 7 " 1001-1500 6 2000 " 3000 6 " Over 1500 5 More than 3000 5 " purchaser may obtain two of an article on sale by paying one cent more than the nominal price of one. In fact, of course, he pays, for example, 13 cents a jar for two jars of jam, and not 25 cents for the first and 1 cent for the second. In the sale of electricity, similarly, the true rate is the average for whatever quantity is taken within the bill period. The fact that the rate varies con- tinuously, instead of by well-defined steps, should not be allowed to confuse the issue. It is significant that, in graduating the rate to meet the expec- tations of large consumers, the electrical companies encounter a difficulty that docs not occur with ordinary wholesale prices. If, ' According to the terminology of the Rate Research Committe« of the National Electric Light Association, Convention proceedings, 1912, vol. 1, p. 199. 46 Eleothical Rati-s for examplo, 7 cents por kilowatt hour is an appropriate rate for a consunior taking H>0<) kilowatt hours or more a month, and -U cent5 per kilowatt hour for a consumer taking 10,000 kilowatt hours or more, the ordinary commercial practice would be to state the rate in that way; just as one rate is quoted per do7:on, and a rate proportionately less per gross. But in that cai^e there would be consumers taking somewhat less than 10,000 kilowatt hours who would pay somewhat more than those taking just that quantity or a little in excess of it; so that at a certain stage a consumer would have the incentive to use more energy in order to reduce his bill. Although, as will appear presently, this problem can be dealt witli by a proviso to the efTect that a consumer taking not more than 10,000 kilowatt hours shall pay not more than $450, such a device still leaves a free zone for the consumer just under 10,000 kilowatt hours, where he can use energy without increasing his bill. Hence the more general solution is to frame the schedule on the so-called "block" instead of the "step" principle. By this method the large consumer pays for an initial block at the same rate as the small consumer and for successive further blocks at decreasing rates, so that the average rate varies continuously with the size of the consumer. The step method of making quantity discounts is perhaps favored somewhat by the preference of the public for a definite and uniform price per unit. This preference may find unintended expression in the rate practices of a manager or he may consciously choose the step method with reference to simplicity and to wiiat the pub- lie considers a fair price. A large consumer understands the rate better if he pays six cents for all the energy he purchases than he does where he pays ten cents for a first block, nine cents for a second, and so on. This feeling is due only in ])art to his reluc- tance to exercise his arithmetic. It is partly due to the fact that the ordinary wholesale prices with which he is familiar in other fields are of the step type. But, though cost per unit declines as quantity consumed increiujcs, for electricity supply it certainly docs not decline after the manner indicated by the step method. The points where the rate changes from step to step may be safe- guarded by limiting provisos, to the elTcct that the consumer of a quantity equal to or greater than that at the edge of the step sliall pay not less than the aggregate amount called for by the rate at that Typks and Elements of Electrical Rates 47 point. The cirect of such provisos on the curve is nhown in Figure 2. They remove the incentive the step mclhfxl offers to confiuniers in certain situations to waste energy in order to pay less money, hut there remain free hlocks or zones under such a schedule where the consumer pays nothin;:^ for additional energy taken. Such a pro- viso cuts oir what would otherwise he a block or zone supplied at a negative price and makes it merely gratuitous. These free zones or negative-price zones may be made of no importance only by having the steps so small and numerous as greatly to increa.se the comj)lcxity of the schedule. Hence the block type of rate is pre- ferred as the more equitable method of effecting quantity discounts.' The various commissions, as well as the Kate Research Com- mittee of the National Electric Light Association condemn the step type of rate.* The effect of the two methods can be compared to good advan- tage by means of curves designed to show the variation of aggre- gate quantity with aggregate price, as well as by means of cun-es of the demand type famihar to economists and already employed in Figures 1 and 2, Curves of the first mentioned type are presented in Figure 3. Hypothetical quantities the same as those used in the preceding figure are employed. In this case the effect of the * " Increment rate " seems to have been the Wisconsin Commission's term for the quantity- block rate. ■• The summary statement of the 1916 report of the Committee on Public Utility Rates of the National Association of Uailway Commissions is as follows: " Such [step] schedules have been dis;ipproved by various state commissions and they should be super,se) liiviiies motor rates into thn-o *o!i : .'f'd directly on the consumer's niaxiniuni. The »onil)ination of this with ;i kilowatt-hour charge yields the familiar two-charge rate, the consumer paying so much per month or per year for each kilo- watt of his maximum demand as a separate charge additional to a correspondingly lower kilowatt-hour charge for energy used. Wholesale rates and power rates are commonly constituted in this way; but seldom ordinary lighting rates. Such a contract may provide, for example, for a charge of $24 per year per kilowatt of maxium demand and in addition 4 cents per kilowatt hour. In honor of its inventor,' this is often denominated the Hopkinson ' rate. While the writer knows of no instance of a rate schedule where the consumer's "demand" for the purpose of computing a rate under such a schedule has been directly defined otherwise than as his individual maximum — indirect elTects of methods of esti- mation are another matter — without regard to its relation to the system peak, there is nothing in the nature of the Hopkinson plan that would thus restrict it. The " demand " might be defined as the consumer's requirement at the time of the system peak, or any conceivable modification of such a method might be employed in connection with this rate type. So interpreted, the Hopkinson two- charge rate is a thoroughly logical application of economic analy- sis. That its inventor did not himself more carefully analyze the meaning of demand is attributable to the pioneer character of his conception. He speaks of electricity supply in relation to light- ing needs only, as was natural at the time he wrote. The " di- • See his Presidental Address to the Junior Engineering Society, 4th Nov., 1892, on the Cost of Electric Supply (from the Transactions of the Junior Engineering Society, vol. Ill, part 1, pp. 1-14), in Original Papers, by the late John Hopkinson, vol. 1, Technical (Cam- bridge University Press, 1901), pp. 25t, 268. The paper is also printed in The Electrician (London), vol. 30, p. 29. The greater part is ali^o reprinted in Rate Research, vol. 2, 1912, pp. 23-28. John Hopkinson was a noted technologist and professor of electrical engi- neering in King's College. London, who died in 1898. ' Bi)th the Hopkinson rate and the Wright rate (described below) are not only commonly 80 called in England and the United States, but it appears are al. known hy these names in other countries. (Cf. Gustav Siegel, Die Preisstellung beim Verhaujc Klektrifcher Enrrfjie, Berlin, 190G.) The Rate Research Committee approves the usag? in question, especi.illy as regards the name Hopkinson, as appears in Rate Resf«rch, vol. 2 (1912-13), p. 160, though the terminology there suggested is not very clearly presented. Both designa- tions are regularly employed in the N. E. L. A. Rate Books. 58 P^LECTIUCAI, Hatf-s vcrsity factor '" it apiH'ars, wiu? m)t hroaihod or dolined till elec- tricity supply had jijrown to somothing like its present importance.* On the other hand, the term "load factor" was used by Hopkin- son. in the 181t2 paper referred to, in a way to imply that his public was familiar with it.* It should be noted that the demand charj^e as well il>< the energy charjie under a Hopkinson rate may 1k^ of the block form. This is slightly less usual for the former than for the latter element. The Hopkinson type of rate is the most generally employed rate for large consumers, both light and ])ower. It is recommended for such use by the Kate Research Committee of the National Elec- tric IJght Association." Another method of taking account of " demand " — one not uncommonly applied to small consumers — makes the computation of the aggregate price depend specificially upon kilowatt hours • But Hopkinson (p. 201) shows a clear conception of its conditions and effect » Hopkinson's paper contains a passiige of interest in relation to the history of the term and the be^inninifs of the Hopkinson type of rate. He says (p. 2.S0) : " The term ' load factor ■ proposed by Mr. Crompton is as constantly in the mouths of those who are inUrestod in the supply of electricity, as volt or ampere or horsepower. The importance of the time during which a supply of elet-tricity is used was so strongly impressed on my mind years ago that in 1883 I had introducd into the Provisional Orders .... a special method of charge intended to secure some approach to proportionality of charge to cost of supply." The cUuM referred to is quoted (p. 261) as providing for "a charge which is calculated partly by the quantity of energ>' conUined in the supi)ly ami partly by a yearly or other rental depending upon the maximum strength of the current required to be supplied." R. E. B. Crompton, it appears, introduced the term " load factor " in a pa|>er on th« •ubjeft of the cost of elettricity read before the (British) Institution of Civil F.iiglneerii on April 7. 1891, published in its Proce««ling8, vol. CVI, p. 2. The term is there described as the ratio of actual output to what the output would be if a plant or engine were worked continuously day and night at full lowd for the same period ; but the ratio to maximum load l« what is actually treated. For the economist the ambiguity is not unlmiKirtant. even though the l>est way of defining and detennining the magnitude of the maximum may not be clear. The relation of the average to the miiximuni load i» entirely an Konoinlc question. The relation between maximum ileiuand and rat. Tlve lOlfl re|.ort (Conxentlon prt>cee-dl\im and even very small slie. of that form of rate which makes sei.arate and dl«tinct dnnand and enrrgy charges, which use was ttiiAniroously recommended in the 1U12 report." Tyimcs and Elemknts of Electhkal Hatek r)3 consumed, but by way of a kilowatt-bour t-barj^'o tbat varies witb reference to bours' use of tbe consumer's maximum. If, for example, tbe maxinnnn is determined at one kilowatt, tben the aggregate price will l)o computed at tbe rate of, say, 12 cents for tbe first 30 kilowatt bours in a given montb, plus 6 cents for furtber consumption from 30 to 60, plus -1 cents for kilowatt bours in excess of (50 taken in tbe particular montli." It sbould l)e noted that tbe gradation is on the block principle. Such a rate is prob- ably more acceptable to the public than the Hopkinson type, because it appears to be merely a modified kilowatt-hour charge and does not require the combination of two charges independently com- puted. For the maximum demand — which even now it is scarcely practicable to ascertain definitely for each individual — some substi- tute considered representative of this quantity is usually employed in applying this type of rate. The irregularity of tbe downward gradations in tlie illustration above used is typical. It is evident that tbe scheme is intended to tax the short-hour user and encourage long hours' use, the latter sort of use being considered, on load- factor grounds, less costly to the company." The introduction of this scheme was due to Mr. Arthur \Vri<:ht." It is more recent, but the writer believes cruder, than the Hopkin- son method. But the scheme has the approval of tbe Wisconsin " This tj-pe of rate may also be expressed by way of percentages of a determinate " monthly maximum consumption," for example, the first 6 per cent at 9 cents, next 6 per cent at 6 cents, all in excess of 12 per cent at 4 cents. " ThQ 1917 N. E. L. A. Rate Book's definition (p. 9) is as follows: " The term ' Wright Demand Rate ' applies to that method of charge in which a maximum price per unit is charged for a certain amount of energy and one or more reduced prices per unit are charged for the balance, on the block principle, in accordance with a schedule based upon the use of the maximum demand." " His historically most important paper Cost of Electricity Supply, was printed in The Electrician (London), in 1896, vol. XXXVII, p. 538, and is reprinted in Rate Research, vol. 2, pp. 359, 376. A more elaborate discussion by him, entitled " Some Principles Under- lying the Profitable Sale of Electricity," is contained in The Electrician, 1901-2, vol. XLVIII, pp. 347, 378, 430. Mr. Wright is also known as the inventor of a tj-pe of maximum demand indicator. His choice of the t\-pe of rate to which his name is applied was evidently based on practical grounds, chieily with reference to the maximum price per unit fixed by law, and he considers it merely alternative to the Hopkinson tjT>e. and a way of applying Hopkin- son's ideas. While the so-called Wright t>-pe aa now generally applied tends to disregard diversity, Mr. Wrighfs own conception of rate-making is not open to this criticism. In the earlier article cited he proposes discounting the demand charge on the b.vis of the diversity factor of the company's consumers as a group, and returns to the subject in the lator one. Moreover, in his application of this tj-pe of rate at Brighton, maximum demand indicators were used, instead of the basic demand being estimated. 5t Elkctbicai, K'ates ami otlior {oniinissions, including New Vdik, Second District," and has lon^ been the most generally employed load-factor rate. Altlu»iigh its fundnnuMital charactoristic is tho incorjmration of a demand charge, it apj)cars to bo distinct because tiie metliud con- stitutes a complete rate without requiring the combination of two charges. The advantage of this metliod is ai)pnrcntly duo to tlie fact that the consumer pays so much per kilowatt hour. Kilowatt hours appear to be all he has to pay for. There is no double charge. But let us see, on the other hand, whether the resulting variation of the rate confoniis substantially to the variation of cost and whether the plan moots the requirements of a reasonable and just demand charge. In comparison with these matters the advantage of palliat- ing the demand charge is not worthy of consideration." It is evident that tlie Tlopkinson rate gives a rate curve that varies continuously or by imperceptible gradation in the same way that cost may be supposed to \&vy. The Wright rate does not yield so smooth a curve even after the initial block is passed. This difference is illustrated in Figure 4, As a result of the level rate for the initial block, it is evident that the consumer with less than one hours use per day has his demand charge (or what is in effect that) reduced in proportion to his decreased use. This is in glar- ing contradiction to the whole theory of the demand charge. It may be defended, it is true, as a means of encouraging the small consumer. Its effectiveness in this direction, however, is indirect and partial, for it confuses the small consumer with the short-hour user. Not only are these two far from being the same, but the failure to distinguish them is contrary to load-factor principles. The small consumer is pro ianlo just as much entitled to benefit on account of a good load-factor as is the large consumer. It is true this criticism applies in theor}' only to the lower end of the scale whore graduation of the rate ceases. •• In lh» DufTalo ra«*, Fuhmiann vii. the UulTiilo Oncral Klrotrlc Co., d*clilfntral Klation. ** In a nit» whrnlulp the Wright type oft«*n apprnn rxtrrriiply rompUnitrd. ThU la due to thi" lti({riilou» HOURS USE 6 CENTS; ALL OVER 2. 4 CENTS. 1 (HOURS USE (PER DAY) OF MAXIMUM | I outweigh in importance a considerable degree of irregularity in the curve. The blanket nature of the Wright type of rate appears in the facts that it may be framed with reference to meeting some of the requirements of a consumer charge and that the ba.>^ic demand ele- ment may easily be modified with regard to diversity. This quality or possibility holds in another respect not yet noted. We shall have occasion later to discuss the density factor as a proper determinant of rates. In this connection it is necessary' only to mention the fact that the Wright rate has some relation to the density factor in that it favors an intensive use of the connected load. But this fact is only indirectly and in part correlated with the intensive use of the distribution system, which is the foundation of the impor- ** This is a meUiod favored by the Wisconsin Commission. 50 Electrical Hatful tancc of the density factor in relation to electrieal costs and rates. On the room or floor-area basis, the Wriglit rate becomes more properly a density-fa(>tor than a load-factor rate. Witli a measured maximum the result is dilTerent in this respect." A type of rate that should be mentioned in this connection, though it is historical rather than present practical interest, is one involving the use of an attaihment that specially registers any consumption occurring during the station-peak period of (say) two hours, which is charged for at twice the ordinary rate, Tlie device was invented by Mr. Gisbert Kapp, now or recently professor of electrical engineering in Birmingham University (England). It appears to be practically obsolete. The adjustment is not fine, but the method is noteworthy for giving the consumer the full benefit of his diversity. The most important practical difficulty seems to have been in keeping the clock-work accurate so that the double rate is applied at the right time." All the various types of rates discussed in this section arc referred to by the writer as load-factor rates. They are also known as " demand rates." A load-factor rate is one that either contains a demand charge as one of its elements or in some other way explicitly makes the consumer's load factor, or his relation to the company's load factor, a determinant of the price paid for electric service. In addition to the types already mentioned, off-peak rates, and possibly flat rates — both of which are discussed in a later sec- tion — belong in this class. Together with breakdown rates, these constitute a miscellaneous group with load-factor characteristics, but of such restricted or special applicability as to leave them only an incidental place in general rate theory." " Tlie chArge for tin- (IrNt bl(xk of a Wri(fht r:ito ih often called Uie primary rate, that for the next the trcondary rate, with |)o»mibly a trrtiary foHowinK The trnnit are rather too Krneral to be entirely appropriate to im and are not free from objc^^^tlon when appIiH to the bUK:k method generally. " Primary " In electrical rate uwiKe refers also to • rate for uiitranifomje«»lbllltlMi of liberal u«e by umall conkumom. *» Th" 1017 N. K I.. A. Hate Hook (p. f>) enumerateii four kIniN of " ilemand " raten. ax follow.: Klat. Wriitht. Hopklnm.n. and the Doherty or three charKe rate The lent l nor in conformity v.:n, \itf iport of the Committee on I'ublic L'tlltty Itiiten of the National AHao<-latioii of Ilnilway Com- mlmioneni nay*: "A (tralKht meter rate per IciloMult hour in flafrrantl}- unfair In that It tlnn not ifivc the Ionic hour u»er hU clue, i. r., it ecux,ion of IUte« for Elcefore the Wiw-onnin Eler«in Tr. L. II. * P. Co., P. U. 11. lOK.A .180) the diver.lty factor l« referred to bji " the mont ImporUnt feature of public utility ratemaking." ••The California Cotnmlmilon Kayn that where a conttvimor ha« an option to have (and pay for) a demand Indicator he nhould be advined by the company of omdition* thnt may point to hU cxerrUltig the option. He San Joaquin IX. it Pr. Corp., P. U. H. 1017K 411 The td Dirt. N. Y. CVimmimilon nay* that In order to prevent discrimination d^nmnd meter* iihould be Inatalled for all cotummem with demand nit««. He I,, 740. *' Ilopklnton hlm«elf upeaku of the demand charge an baAed upon a y2. alKTie. Wriglif^ ejpre»iilon» tiUn are clear a.* fo tlie annual peak lieing what U really algnllWnt. Indeed In The Klertridan, vol. 48, p. 879. the »econd of the Types and Elements of Electrical Rates 61 But in the Wrif^lit type of rate the principle of averaging is usually given much broader scope, in particular where the maxi- mum is a matter of classification and is assumed, not measured. The '' active load " is fixed for a class of consumers while the actual maxima vary greatly from consumer to consumer as well as from month to month. The consumer under such a rate has no motive to keep down his actual peak. Of course, because of diversity, the actual individual peak may be of little significance. The degree to which the averaging of maxima among consumers classed together may properly be carried, supposing that it will be done, depends mainly upon the importance of the diversity fac- tor. The diversity factor for a group of small consumers, in particular residence lighting consumers, is especially large. In- deed, it is obvious that the greater the number of consumers taken into account and the briefer their peaks, the greater will be their diversity factor. Hence the larger the class or the more diverse its composition, the less the significance of the individual consumer's load factor in the making of the rate, or, if the actual load factor of the individual be made basic, the greater the necessity of dis- counting it in computing a fair rate. According to this reasoning the small consumer's load factor is relatively less important than the large consumers, even after the two have been " reduced to a common denominator" by the aggregation of enough small consumers to weigh equally with the large one as regards quantity of energy taken. Not only in taking account of load-factor conditions by way of class-average rates, but also in the averaging of a number of pealt the individual consumer's ma.xinnun demand as the final determinant of a demand charge, the proper width of demand to be ai)plied for the various classes of consumers would be a higlily important rate question." Not only overload capacity but the economic and tech- nical availability of the storage l)attery as a source of direct-cur- rent supply for a .short time would have to be considered. It has already been stated that the method of determining demand is as im])ortant an object of rate regulation, at least in principle, as is the kilowatt-hour rate itself. But a satisfactory method has not been easy to find, or has only recently been made so by imj)rovements in load-recording meters, hence the situation as regards demand charges and load-factor rates has been confused and confusing — not least confusing to public-service commis- sioners — and refractory to regulative treatment. The subject of demand meters pertains to electrical engineer- ing rather than to economics. A non-technical judgment as to their availability will naturally rely chiefly on the fact that meters adequate to the registering of all the facts needed in order to apjily load-factor rates are in common use for large consumers. The optional rates of various companies indicate that a great extension of the use of such meters for medium-sized consumers is economically practicable. That they are not more generally or universally used for large consumers may be due to the greater interest of managers ••Cf. p. 14, alxnc, latter part of fi>otiiot^. "An Impravrd typt of " |i>Karithnii<- " hiHit-ktoraup inctfr 1h diM-iuihod in a papor on Untn and Hate Makinjc. by I'nul M. I-lnroln. 1016 A. I. K. E. l*rocp«>.lli»jrii, paK«" 217:. ^214. In the l'ro<-c«lln|c» for February, lOlK, In a pop*r on The C'hnrartcr of the Th'-rmal Storajfr I>enian'l MHcr (paKr« 1471(1R), the wiiiip author Knyii that, in rontraM with Ihr lilock- Intrnal meter, hl« typo " (cl»e^ the true hratlnc rtTe< t that flxm the nirA- of e«|uipnient and th«Tref'ire rout that nhould l>r n«wi.«ee— not merely rejjluterii tlir i>«-ul<, hut rej-ordu thn fuiU an to ce«dlng» of the AMOciation of Editon lllf. Cos. in the (ootnot« at p. 14, above. Types and Elemknth of VAS.crnicMj Hates f)3 in exercising more freely all the bargaining power they posecss in order to overcome the competition of the isolated plants. If so, it is a specific pulilic interest that load-registering meters be installed for all large consumers. It is also a general public inter- est that as niiuli knowledge as possible bo available as to load- factor conditions experienced in dealing with various cla.«ses of consumers." Aside from the matter of expense — in regard to which the situa- tion may be met by leaving the small consumer out of considera- tion — the chief problem is apparently how to make the clock's share in the working of the meter entirely reliable. Frequent inspections are expensive. It ought to be possible to solve the problem for a tape-using meter by providing for registering on the tape the receipt of an impulse sent from the central station at a specified time each day. On this basis the record could be adjusted with entire fairness and practically unimpeachable accu- racy. The sending of such an impulse over the distribution sys- tem would be entirely practicable and would in no way interfere with the ordinary function of the wires." In addition to those discussed, there are many other ways, all more or less arbitrary, of obtaining a substitute for the consumer's maximum instead of measuring it. The first report (1911) of " The type of meter which in the opinion of the writer has most economic significance is the one classed and described in the report of the Committee on Meters, N. E. L. A., 1914 Convention proceedings, Technical vol. p. 22 f, as an interval maximum-demand instrument of predetemiinod time interval with record of the time at which maximum occurred — which may be either a printometer or a graphometer. The decisive advantage of 8uch a meter consists in its enabling diversity to be taken into account to any desired extent, while the individual maximum also is shown. Where the readings are integrated for specified periods of time it is possible to obtain the average maximum for any desired time intcnaJ. The recording of instantai>eou8 fluctuations, however, so far as desired, is not provided for by the printometer. If diversity were not in question the matter of the duration of the peak might perhaps be dealt with to better advantage othenvise than through an internal meter. The limitation upon overloading to meet a peak demand depends upon the time during which the overload is carried, since the overheating is a cumulative effect. ** U. S. Patent No. 1.181,427 (May 2, 1916) was granted for an invention of which the following is a part of the specification: "The object of this invention is to provide for operating electric signals available for street or other fire alarms, ambulance calls, tht sync/ironijifij; of clocks and other purposes, over ordinary electric lighting networks or power mains, or conductors which are also used for supplying electrical energy in the district or for tramways, and in such way as not to interfere with the ordinarj- operation of the said light or power mains," etc. Circuit-breakers and limiting switches could be operated in the same way from the central station, so that the hours of use for any grroup of consumer* could be adjusted at the will of the management and diversity assured wherever legitimately expected. Gi Elkctiiu Ai. 1{ati:.s the Rate Kesoanli Coniniiltcc of the National Kleitrie Light Asso- ciation ** enumerates the po^:sibilities as follows: Measurement of the demand by instruments; frontage of premises; valuation of premises; connected load in kilowatts or sockets; number of rooms; floor area; cubic contents; ground plan area; constant per custo- mer, etc." The Committee's own expressed preference was for floor area, whether used directly or reduced to number of rooms. The assessed value (or, in the English phrasing, " rateable value ") basis is of special interest to the student of economics. No instance of the employment of this method in the TTnitcd States has come to the attention of the writer, but its use in England appears to be not uncommon, where, however, it is generally optional as well as restricted to a small class of consumers, especi- ally private residences. Some of the other methods also may have been influenced by the ability-to-pay principle of taxation as well as by load-factor considerations. In some of these developments the original Ilopkinson theorj' has become obscured. The situation is in part explicable, how- ever, as due to the mixing and fusion of other species of differ- entiation with such as have reference to the company's load curve or to taxing peak consumers. Indeed, the Wright type of rate, in the form in which it usually api)ears, is, as has already been noted, rather a density-factor than a load-factor rate." Flat. Breakdown, and Off-Peak Rates There remain two other theoretically interesting modes of rate- making which have reference to the load factor. One, the flat rate, may be described as charging only for demand and not for energ)-; the other, the on*-pcak rate, allows no cncru^v to be taken at the company's critical peak time and accordingly mak(>s the kilowatt-hour rate low for times when consumption is allowed. The breakdown rate is related to the lirst and in elTcct is (or should »* Cofivn.tlon imxTMxIltufii, 1011, vol. 1, p. 318. ••The 1010 Hcj-ort c.f Uic Ulllcrcntinl lUlwi Comnilltw! of Uie National Ooinnicnlal Oai A*>ocUtlofi rrfi>n of rate which attempt* to «lmi>)lfy the Mtltriate of demand, by ha»liij{ tU" (lirTprcntlullun In the nite upon other i- the num- l^r of r«rxiiU mechaniial device adopted to accomplish this, the name " limiter rate " has recently come into use.** However, it is not practicable by such means to limit or restrict the time of day when energy is used. On the other hand, such procedure is entirely feasible for certain classes of large con- sumers — in fact, the current may be switched on and otf by tho company. Sigii lighting, which is frecpiently the sul)je(t of a special rate, may be so dealt with. An isolated or private electric plant will occasionally need cen- tral-station service (1) in case of interrujjtion for any rea.son, (2) in order to supplement its own generators at times of special demand, or (3) for auxiliary service at intervals of light load. In the second case the central station is called on for aid in lak- **Th« •rcorid report of Uie Kate IletM-un-li ConuiilttPc qiiiiUnpilly re<"oinniendi» a flat rate for concumera whone inaxlmuin will (all brtwwn 100 and 300 wattM (N. E. L. A. Convention pr. lOS, 1»7). With rrferenoe to tlir problem prex^ntrd by hl(fh- efllflmry lamp* thli malntiiitui nlmpllclty by golnjf from one cxtrpine to the other, that 1*. from a pure klUrtratt hour rat*- to a pure demand rate. TIkr l»in report (Convention pro- f»edlnff», genl. vol., p. 222) reonnmenda a rontrolled Hat rate nn an option only. In the 1920 .v. E. I.. A. Hate Ii<»ilc (p. 12) the ultuatlon in dcH< rlbed a* follow*: "Several yearn •so It wai )>ellevMl that the Klat Demand UuU' khould not be UNcd. but recently thU type of rate ha» a«ain come Into uae for Mnall renlderu-e runtomerii." •' The IlUnoU Commlolon h*» nanrtlnnwl aurh ralen. nt Hmt experlmenUlly ( H Hatr Horan-h in.'>) and later i« an •vUblUhnd prartlr* (\0 Hate Heiwarrh 102). aervlre but peoj)le object to paying other than a constant unit price, and especially to paying something when they get noth- ing, and they are not willing to admit that mere '* readiness to sene" is a service, or that reading (or attempting to read) the met^r and collecting the bill are services to the consumer. From the point of view of the company, therefore, even apart from public prejudice or legal necessity, it is well not to be too exacting in the matter of a consumer charge. For the later reaches of an average rate curve that shows the variation of average cost and price with quantity consumed, that is, for large consumers, the initial con- sumer charge has no appreciable effect. The meter charge has practically the same basis and effect as the consumer charge, e.\cej)t that it provides for some degree of graduation according to the number of meters a consumer may have and also according to the size of the meter. Since the meter capacity is to some extent an index of the " active '' connected load of the consumer, this feature assimilates the meter charge to the regular demand charge. But it is not to be expected that the graduation by size will take account equally of kilowatts of capacity regardless of their position in the scale; that is to say, a 10,000- watt meter will not carry a charge 20 times that for a aOO-watt meter, but more likely one in proportion to the comparative i-ost of the two meters. Another importimt ditFerence to be noted is the fact that the administration of the meter charge is a simple matter and it is apj>licable with ease to small consumers, while the straight and strict demand (harge is administratively imprac- ticable except for large consumers. The fact that the meter charge is based largely on operating costs has already been mentioned,** A minimum charge of (say) $1 per month serves the purpose of a consumer charge, though without precision, and it allows the consumer without further charge to take a return in kilowatt *• A well-known ftly adviM-aU of roini)l«rx ratrii, Mr. Henry I>. Oohrrlv, In a jiapsr »ntltlH KqulUhl*. rnlform an32) in its "approval of a scheme of minimum charges, not, however, based on the cost as reflected by the varying demand of different customers, but so desigrned as to prevent the curiosity seeker from inflicting a burden upon the company, and sufficient in amount to compensate the company for the costs of maintaining and reading meters, bookkeeping, collecting and the general costs which are more or less proportion«t« to the number of customers." f% ELECTRirAI- "RvTFi? there is a specific provision npiin?t any meter rental, which, pince it is directed at the fomi rather than the suhstance of the charge, is easily avoided, unless the lanjjrnap' of the law is very compre- hensive. A legal or contractual maximum per kilowatt hour directly destroys or mutilates a minimum charge. If the fixed maximum rate is high, however, initial charges may be adopted which are elTective only to raise the general rate to the maximum for small consumers and are entirely ineflFective at no consumption. For example, if the maximum is 15 cents and the general rate available to small consumers is 8 cents per kilo- watt hour, a minimum charge of $1.00 a month is effective in raising the rate from S cents for 13 kilowatt hours a month ($1.01) to 15 cents for 6 2/3 kilowatt hours ($1.00) or less, 4 kilowatt hours being chargeable at not more than GO cents, etc. It should be noted that under this arrangement there is a free zone between 6 2/3 and 13 1/3 kilowatt hours a month. The illustration sup- poses that the minimum charge is on a strict monthly, not annual, basis, or, in other words, that the portion of the $1.00 collected in excess of enough to cover the consumption at 8 cents is not appli- cable for kilowatt hours consumed in another month that are above the reach of the miniimim charge as applied to that month sepa- rately. The latter sort of charge, though collected monthly, may actually be a per year minimum of $12.00. Tiiis point is dealt with in the next chapter in discussing the grounds for preferring the meter charge. Contractual maxima based upon agreement with a municipality have been interpreted as referring only to the output charge, thus not preventing the establishment of another charge serving a different purpose alongside of and supplementary to the former.** Such an inUtrprctation of the law when it has been applied to statutory maxima and franchise grants, as (listinguislicd for ordi- nary contracts, has been defeated in the courts." However, such a charge may be put into clTect as part of an optional rate which •Thu» Ui» Ohio ComniU»lon, In the Llmt N.iturul (;aii Company cue. .Tune 2. 1019. njvk : " We «lo not vCTie that a rcodlneM-tonen* chanro I" « chance for icm." 16 Rate He- M>arrh 342. ••The New York Court of Appeals In dpallnjr with miMin do«lNl.mii of the 2ntl. DUtrlrt ruMIc Servlre C>imml»»lon. Types and Elements of Electrical Rates 73 the consunior may chooso in plarc of being Bcrvoi] at the legal maximuni." Surh a method will probably leave a con.'^iderable number of small consumers served at a straiLdit kilowatt -liour rafc Lamp Renewals The supply and renewal of lamps for a lighting consumer is still in many cases covered by tlic regular charge per kilowatt hour." Even in these cases, however, for large consumers the rate is made without lamps, leaving the consumer to purchase them indepen- dently. Other than standard lamps are, of course, purchased, but usually, if purchased from the electrical company, at a special discount to customers that are entitled to free renewals, since such lamps take the place of standard lamps that would otherwise have to be supplied. In comparing lighting and power rates allowance must be made for the fact that lamps are not needed in the latter case. Inspection of a company's schedule will usually reveal what it believes (or prior to war increases in cost believed) to be the equivalent of the lamp." The development of high-efficiency tungsten lamps of small sizes which cost somewhat more than the standard carbon so that their original supply and free renewal cannot be treated as matters of course gave rise to an interesting situation. Their general adoption, without an increased use of much higher illuminating powers, portended a very much reduced revenue from small light- ing consumers, wlio were already alleged to be unprofitable. Hence " Substantial effect of the method of the New York Public Sen-ice Commission for the 1st District in the case of the New York k Queens Electrical Light and Power Company, 1917 N. Y. 1st Dist. P. S. C. R., 87. " According to the 1917 report of the N. E. L. A. Committee on Lamps, 61 per cent of companies reporting to it handled lamps only as merchandise. " The 1911 schedule of the New York Edison Company allowed to conmmers under the general rate (which included lamps)) who took above 1500 kilowatt hours a month one-half a cent per kilowatt hour if they wished to supply their own lamps. Many large consumers did not avail themselves of this option. Since May 1, 191.5, the kilowatt-hour charge does not include lamps, for which a separate contract at the rate of one-half cent per kilowatt hour is offered. This commutation basis seems to be the one usually adopted in all parts of the United States. Such lamp scrxice was discontinued by the New York Edison Company on July 1, 1918. 74 Elkcthicai- Hatks they were often supplied to consumers at rates that cnrouraged the usp of the Inrij.T, instead of the most Kuital)le. candle powers.** It is quite evident that a company that supplies a GO-watt lamp free and asks prices for the smaller sizes that increase as the size diminishes is not sellinj: lami)s to its consumers on ordinary mer- chandizing principles. It has in view its revenues per kilowatt hour rather than direct comi)ensation for the cost of the lamps. That the consumer should ho olTcred such ostensihly large induce- ments to use lamps of hiudi illunminating power is not the hest way of adjusting the business to the new conditions. On the other hand, it is not easy to determine in just what respect the company should proceed ditTerently. A 5(')-candle-powcr unit may he most suitable where very bright illumination is wanted, but it does not appear that the discouragement of the use of small tungstens where a liright light is not wanted is justifiable on general eco- nomic grounds, that is. on the basis of a difference in fi.xed cost for a given period of service as between the tungsten and the carl>on-filament lamp." The expressed desire of prominent central-station men to con- trol the sUuatwn as regards the supply and renewal of lamps is doubtless in part due to a justifiable wish to prevent the use of technically unsatisfactory connected appliances. But tliey would ••The price lUt of the New York Ediiton Company for plain (not frosted) Mazda (tungsten) Umpi as of January 1, 1017, wan an follows: Additional CharKc Lamp und'-r Lamp Scr- N w-nalfi Wattage vice Agpccmcnt Trice 10 .17 .22 16 .16 .S8 10 .H M S5 .10 .IS 40 .0,'. M 60 Frro ,ta 60 Frre .20 100 Kro" .fi8 160 y^"' "7 S60 Frre 1.42 400 Free 2 64 600 Free 2.70 The Commonwealth Kdlton Co. (Chlraito) rrnt* (or lately rente. A. Hate Kcsonrch Committee rpoommpiidod that, if available, tlie price data of a local coal ex- change 1)0 used in place of average costs per ton." Hut it implied that such a basis will scbbmi lie available. The policy recom- mended would tend to put the burden of bad purchasing policies upon the company and, on the other hand, give it the benefit of special skill in this direction. It is sound. There would doubt- less also be a considerable advantage as regards ease and objectivity of the methods used in deriving the increase per kilowatt hour. The Kate Research Committee also says that, if the rate is above a certain minimum, the coal clause should, as a matter of course, provide for a scale of reductions corresponding to the increases. I>uring the period within which the coal clause has been developed, however, such a provision has not been of jiractical interest, hence its absence need not be attributed to unfairness on the part of thn companies. The idea underlying the coal clause is that of a sliding scale of prices varying with costs. But the familiar sort of sliding scale works in the other direction, wages for example being made to vary with prices. The coal clause in this respect is analogous to cost-plus-a-per-cent contracts — which are not generally conducive to economy and efficiency. It has the characteristic weakness of that scheme, in so far as it does not distinguish high cost due in part to mistaken purchasing policies, or low costs due to special efficiency, from such costs as are due to uncontrollable market conditions only.** The suggested use of coal-exchange prices would obviate this objection, if not so seldom practicable. However, the In ■dvujcc the price to him of tlie s*n Ice to bo n-iidorcd." Uence, it deoldM adverwly a* to the applt'-ation u( variable rate*, althouKh the applicution of a cool clauKp to large electric-power roiuiunien, who are able to calculate pxpensoii, is not <'Oiiiildi'rendrn««H| form thr clin-trli-al ratr (ifhpook an rrjpird« the deirree of prcvalmrc of rarloua rate types and practice* have b««n made to conform to tlie data ther« ^ven. Types and Elements of Electrical Rates ^^ has lately sometimes boon employed as a means of increasing revenues. It is of interest to note that sometimes the prompt-payment discount, so called, becomes in fact, through an increase of the percentage for the larger demands, a quantity discount. Since the commercial credit of the larger consumers is presumably bet- ter than that of the small ones, and the cost of collection less for the former, and since the prompt-payment discount is a collecting and credit device, such a use of it is in cfTect false labeling. A type of rate seldom used and difficult to classify, but economi- cally interesting, is the ''output rate," under which a consumer (who is of course a manufacturer of some sort) is charged accord- ing to his units of output for processes using electricity, as, for example, an ice-making plant according to tons of ice produced. Kilowatt hours per ton of ice, it should be noted, are not constant but vary greatly with the load and capacity factors of the ice plant. This plan introduces the ability-to-pay element into some- thing resembling the energy charge. In this respect it is like the demand charge based upon assessed value of premises," and not unlike certain ways of applying the Wright type of rate. The device of optional rates — not only a precautionary aid to experimentation, but if skilfully used, sometimes an important means of self-classification — is discussed later in considering class rates." Special contracts between a public utility and individual large consumers, though having a term of years to run, have been held by the courts to be a part of the rate stnicture and subject to revision by public utility commissions. Such a consumer may be entitled to special consideration, rather than to specific per- formance under the contract, if he has made expenditures and commitments adapting his premises to central-station service or done anything involving a consideration for the contract. Most of the details that might receive further attention are not important, in the sense that they are not to be reckoned with as permanent elements in the electrical rate situation. It has been the plan of this chapter to emphasize what has shown itself to be " S€€ page 64, above. " Page 114. g2 Electrical Rates permanent anil what contains promise of further development. But there is a clanger of misroproscntntion in thus picking and choosing, even whore one attempts to he fairly comprehensive." The evidence of what is to come that is alTorded hy the recent or present dominance of one or another method or practice among the leading electrical companies ought, so far as possihle, to be set before the student in full for such use as he can make of it. There is still much experimenting with new rate devices to be looked for, and it will he a long time before there is substantial uniformity of rate types throughout the country. Inertia, if noth- ing else, will long preserve the remains of present fundamental differences between the rate schedules of various companies. But the general tendency henceforth will doul)tless be toward simpli- fication and at the same time toward uniformity. " Brief descriptive data showing the slpiiflcaiit (act* about the rat* schedulet o( the mort Important electrical companies in the United States p^c^ented in tabular form would be highly valuableu The dilflcultlc8 of such Ubulatlon are not few. The N. E. L. A. Rate Book meeU the need to some extent. Where differentiation is so Important, averages (or consumer classes are worth little. Indeed, comparisons o( such averages might serve well to Illustrate the limiUtlons upon their Bigniflcance. On the other hand, the reduction of tb« facts to tabular form Ih essential (or convenience of comparisoa CHAPTER III THE REIMBURSEMENT OF SEPARABLE OR PRIME COST Importance of separable or prime cost. Only two rate elements closely related to it. Output cosl — the kilowatt-hour, minimum. Inexactness of any separation. One cent per kilowatt hour ordinarily more than separable cost. The residual method of analysis not applicable. The kilowatt-hour element most likely to be heavily loaded with general costs. Consumer cost or initial cost o] service. Relation to extension and to intensification of use. Taxing the adjacent class for initial cost. Relation to a low kilowatt-hour charge. Proper amount of a con.sumer charge. Rural extensions. Comparison with gas. Possible limitation upon the combined rate. Politics involved in the maximum rate. Lamps a special question. Lamp efficiency in relation to the service charge. Recent great progress in lamp efficiency. Slowness of the adjustment of rates to this situation. Carbon filament lamps are economically obsolete. Discontinuance of free renewals desirable. The general employment of a service charge would largely solve the problem. The meter charge the preferable form of service charge. Best especiall}' when there is no demand charge, as is proper for the small consumer. Meter capacity actually a fimction of demand. Graduation of the meter charge. Encouragement to liberal use of kilowatt hours. Prevention of discrimin- ation against the intermediate class. The annual basis of the usual mini- mum charge objectionable. No question of meter rent. A two-charge rate is not complex. There are certain costs so definitely caused by the service of this or that consumer that any system of charges at all conformable to sound economics or to ordinary sentiments of justice will obtain reimbursement for at least these costs from the consumers immedi- ately involved. The preceding review of electrical rate elements, if not common knowledge of the theory and practice of rate-making, will suggest that general carr}'ing charges for fixed capital are not among these separable costs. Such expenditures are made as part of the general outlay necessary to the undertaking and are only secondarily or ulteriorly to be considered in determining whether a particular customer or class of customers is worth having. They are not a part of the prime cost directly due to the service of a specified individual or class. From among the rate elements above passed in review, it is easy to select two that relate especially t. the reimbursement of separa- ble cost. These are the initial or service charffe and the kilowatt- 83 g4 Electhicai. TJatka hour ihargo. As regards tho latter, however, since it is likely to bo tho prineiinil feature of any . kih)\vatt-hour element will usually take care of so much hesides kilowatt-hour soparahle cost that in actual rate- making all one ncorls to consider is merely that if the exigencies of the situation had liajiponcd to favor cutting the kilowatt-hour charge to separable cost and in case of douht hurdening other rate elements, rather than it, the kilowatt-hour charge might easily be much lower than it is likely to be made. It matters little for present purposes whether two cents instead of one will often be necessary to cover variable energy cost. The kilowatt- hour charge is seldom calculated with reference merely to reim- bursing for separable cost. Illustrative examples of the results of analysis of cost for elec- tricity according to underlying variables and possible rate elements are given in Chapter V, page 125, below. Consumer Cost or Initial Cost of Service The nature of consumer cost and the various ways in which it may be dealt with have been indicated in the discussion of rate elements. That such costs are separable per consumer or per some related unit is not open to question. Any sort of initial charge — and such is the essence of a service charge — operates as a discouragement to the potential consumer, especially if small, who might otherwise become a customer of the company, and, even though at first no more than paying expenses, ultimately a profitable one. The indirect effects of a policy that restricts business are always worth considering. The fact that large consumers often grow into such from small ones is probably of less weight than the effect of familiarizing the public generally with the use of electricity for all sorts of light and power service. There is no reason why electricity should not in time come to be thought of as a necessary of urban life, just as gas now is. It may be maintained that it is bad economy for practically all residences to be supplied by both utilities. But gas will doubtless continue to be needed for cooking and. for the rest, it is simply a question as to whether gas lighting or electric lighting is superior as regards cheapness and convenience. 88 Electrical Rates There are too mniiy questions as to tin- proper basis of com- parison botweon gas luul clcctririty as. regards cost and Pcrviceability to the consumer to make it practicable in this connection to put the facts into terms of dollars and cents. For electricity we should probably assume the use of 50-watt tungsten lamps, perhaps also some of smaller size and less efTicicncy, but not at present of gas- filled lamps. On the other side, are we justified in assuming the general use of incandescent mantles, and, if so, must we also sup- pose the more costly high candle-power gas to be used with them? Supposing the consumers' premises piped and wired for both gas and electricity, and supposing small use of incandescent gas mantles, electricity is the cheaper illuminant as well as preferable on general grounds of convenience and sanitation. But under any sort of initial charge the comparison is affected bv the amount of energy taken. It is clear that, with a service charge for electricity and with none for gas, the latter would be the more economical for the very small consumer. But in the ease of all consumers above the very smallest the advantage of electricity over gas should be decidedly increased by a correspond- ingly lowered rate per kilowatt hour. The slightest consideration of consumer cost leads to the con- clusion that there is somewhere a lower limit of size below which it is unprofitable for the electrical company to get the business. If the company serves this class at a straight kilowatt-hour rate, it must Ik* granted the right to make up the excess cost somewhere else. It seems logical to take the compensating profits from the next largest chuss, especially if the members of the smallest class get their service at less than cost because of an initially level kilo- watt-hour rate, which will naturally be extended to neighboring size-dai'ses. If, on the other hand, the company is j)rotccted against the undue extension of this kind of business by some sort of an initial charge, the kilowatt-hour rate can properly be nunli lower. Even if the smalh'st class still does not entirely pay its way, there is no reason why the initial kilowatt-hour charge sliould be affected by this fact, though the excess cost, if important, must be made up to the company somewhere, perhaps by a generally slightly higher kilowatt-hour charge. The width of the first block under a simple kilowatt-honr rate is a test of the extent to which the consumer of moderate size is Reimbursement of SEPAiLvnLK oit Phimb Cost 89 made to sulTer because of the failure to have a separate initial charge and a two-charge rate — or possibly of the extent to which he suf- fers from a low legal maximum. The arbitrary nature of the determination of the limit of the first block is reflected in the fact that its width ranges from 10 to 1000 kilowatt hours a month.* Obviously such difTercnces are not results of difl'crenfcs in cost. If consumer cost is taken care of by some kind of initial charge, the initial kilowatt-hour rate should be correspondingly lower.* I^t us suppose, for example, that the initial rate be reduced from 10 to 6 cents per kilowatt hour. Such a change is l)Ound to have an important effect upon the liberality with which electricity is used by those who will readily pay consumer cost by way of a separate charge. Not only will the average size of this group of consumers be increased by some of the very smallest consumers being cut off, but the remaining small consumers will tend to use energy more liberally, not only for lighting but also for power, cooking, and even heating purposes. This should be of decided advantage to the company as well as to the community generally. The two things the electrical company especially needs are evenness of load — which means diversity of use — and density of consumption — which means that any district (a residence district, for example) worth culti- vating should be cultivated intensively. An initial charge, with the rest of the rate schedule appropriately adjusted to it, cuts both ways. But it is clear that the initial charge should be made as small as may be, consistently with its purpose to take care of consumer cost. In other words, only prime or separable consumer cost should be included. For this reason the writer would, at least in a very large city, exclude the cost of service pipe and wires from any computation to determine this element in the rate. The cost of connecting an apartment house containing fifty families with a street main is no more separable, and chargeable to the individual consumer, than are the wires stretched along a block-front to supplv 20 private houses. In a city of multiple dwellings, the distribution system extends almost to the meter and its cost is a joint cost. ' N. E. L. A. Rate Book, checked to 1920 Issue. Aubum. N. Y., 13c. for the flrrt 10 kw. hrs. ; N. Y. Edison and United Elect. (New York City). 7c. for the first 1000 kw. hr». York, Pa., shows 20o. for the first 5 kw. hrs. and 8c. for the next 200. ' Where a municipal council had not provided for a minimum charge, the Ohio Public Utilities Commission (re Cleveland Elect lUg. Co., P. U. R. 1920B 891) said " the maxi- mum rat« must necessarily be sufficient to cover the mo&t expensive short-time »er»ic«." 90 ELEcrnirAi. TJatfs Thero arc various opinions ns to tlio normal nniount of consumer costs, but it is the common opinion tliat $1.00 j)or month per con- sumer or less will cover them. One chtllnr is in fact rather large — or was large prior to the \\:\r. It may ho appropriate for detached houses considerahlo distances njiart — for suburban or rural con- ditions — * but not for multiple city dwellings. Often some element of fixed charges on the distribution system is included, and it should not be. And service pipes and wires l^elong with the distri- bution system in the case of multiple dwellings. Thus qualified and explained, 50 cents per month may be deemed at least a fair standard of reference.* Rural extensions of electrical service involve heavy costs per consumer analogous to most of the elements of the service charge with added emphasis on the cost of physical connection, trans- former and transformer core losses. The cooperative building of lines by farmers has sometimes been adopted to meet some of these costs. In this case density cannot be made to help. ♦ The Indiana Commission considers $1.00 the reasonable minimum charge In the country corresponding to 50 centii for the city. Decision of August 7, 191G, 9 Hate Ke«. 391. * The following tabular stiitement comes from the testimony of the Commonwealth Edison Co. of Chicago, on which basis in part the Ulinois Public Utilities Commission approved • minimum charge of .00 cents a month. See its decision of June 26, 1916 ; also 9 Rate Research 248. The statement happens to bo even more directly indicative of the nature and proper amount of a consumer charge and is here reproduced chiefly with reference to that view point. SUMMARV OK TIIK CUSTOMF.R.S' COST (INCLUl)INO AI.L ITEMS ON CU.STOMEUS PREMISES) Cost per — ^ -A > annum monthly Fixed charges on flrrt cost of watt-hour meter 1 03 .086 Fixed charges on cotit of first supply of Incand'went lumps S3 .019 Meter reading, billing, bill delivery, bookkeeping, claim and statistical. . . J. 01 .167 Meter Itistallation, removal, maintenance and testing 90 .076 Incpectlon on customem' premise* 10 .017 Customers' repairs, Including household devices but excl. meters 34 .02« Fixed chargrs on servlct connection 41 -034 Maintenance of s^rv Ice foiine<;tlon 1^ -01' $5.27 1.489 General expense, such as office rentals, telephone, telegraph and general tupervlnlon at li per r»>nt of the particular expenditures listed above. .79 .066 ToUI Customer's cost tO 0" » f'OC Ei.erKy u«e-alure of the opinion* in Uiin rnne. The retil liwue of the cane, dljw-rlmiiuitlon through lunc" quantity dlHoounta, waji not met But private plant InterentJi are not the bo«.t protiiiconlntx of the umall consumer. About the Ut of Novmiher. 1010, a further, and nominally voluntary, reduction wan obtained fn>m the company. promUlnfr 74 ceiiU aa thn maximum from January 1, and 7 cenU from July 1. 1017. .None of thiHio rKluctlonii appreciably benedt the Intennwllate rlnji* that <:in nrlth"r »ine the iiolated plant an a club nor nwing election* by lU vote*. The 1011 bl.xk charire-^ were •o adju.te'l (wime of thrm ral'i-d) in lOIf. lh.it the neneml rate conMimer of Intrrnifllate iixe, after allowance for the .^.tlon of aupplylnR hU o^^•n lampa. remBinH dubslantlally where b« waa before, the reduction on 1000 kilowatt boura conmimi.tlon Ix-lna »I DO iind on Reimbursement ok Si:pAUAnLR on TrtiME Cost 93 The claim for ri'diKtiun of rates on -^^'iioral economic grounds is strongest for consumers intermediate in size, perhaps small as rcf^ards connected load but comparatively long-hour users. A wide initial block may easily be made to deprive them of the possibility of iiiiv rcduclion from the niaxiinum rate.' l&OO, $1.30. Beyond the latter point the rate wan somewhat lowered. In the reduction of Jan. 1, 1917, increa-ses in the block charges between 1200 and 2500 kilowatt hours niuiithly about balanced the reduction on the first 900 kilowatt hours. \ similar Htateiiiciit applic.-i for the July 1 change. The gist of this situation is that mere size as such is not allowed to benefit the consumer until he approachce the competitive clas.s. These compen- sating features of the changes in the average-rate cur\e, however, should not be taken to mean that there was any corresponding balancing of gain and loss in the revenues of the company. There was of course a very considerable cut. In the Brooklyn Edison case the view of the Commission is indicat'ti by the following quotation (191C X. Y. 1st Di.st. V. S. C. R. 175,228): "The minimum bill now in effort serves many of the uses of a meter charge or consumer charce, and thei practice of the com- pany nuiy, therefore, be left undisturbed." This, and other parts of the opinion, show progress towards a position favorable to the service charge and thus to preparation for meeting the issue of discriminatory quantity discounts squarely on its merits. The opinion and order in the New York and Queens Electric Light & Power case (1917 N. Y. 1st Dist. P. S. C. R. 87) — which company is an intercorporate associate of the New York Edison — bears on the views of the Commission on this subje<;t. It results from a compromi.se accepted by the company. A meter charge of 60 cents is instituted in combina- tion with a kilowatt-hour charge of 9 cents, but the resulting combined rate is limited to 11 cents a kilowatt hour, except that a minimum charge of $1.00 a month is retained. The restrictive clau'.es are accepted provisionally for the time being, and the opinion ex- pressly favors substituliiig the consumer charge for the minimum charge. A later axpression of opinion by this Commission is as follows: "For the present the Commission approves a minimum charge, resening, however, for future consideration the question as to whether a fixed consumer charge should not be adoptM by the Flatbush Gas Co., as well as by other electrical companies, in place of the minimum rate. Of course any question of a future change in the direction of imposing a fLxed consumer charge would necessarily involve a readjus-tment of the energy charge to which it is to be added " (Feb. 1, 1918). P. U. R. 1920E 930, 1020. The N. Y. 2nd Dist Commission decidedly prefers the consumer or service charge to the minimum charge, for good re.isons given, as appears, for example, in a quotation in the Electrical World for Jan. 15, 1921, pnge 172. • On this subject a recent opinion of the Mis.souri Commission (tn re Fort Scott & Nevada L. H. W. & P. Co.. P. U. R. 1915F 540) is much in point: " These rates .... result in a uniform rate of 10 cents per kilowatt hour to residence consumers, except, of course, as to thosa whose accounts are not paid by the 5th of the month, and to those who fall within the minimum monthly charge. This result is due to the extremely large blocks, starting with 100 kilowatt hours for the first block. No residence consumer uses more than 100 kilowatt hours per month .... consequently, no residence consumer participates in any of the lower rates on the sliding scale. The blocks appear too large also for business lighting, and the size of the block militates against the very purpose of block rates on a sliding scale .... limiting unduly the proper effects of long hours' use of electricity and minimizing the encouragement of long hours' use." It should be noted that the objection is to a first block one-tenth as large as that of the New York Edison Co. On reducing the maximum in 1915, the width of the first block was extended by this company from 250 to 900 kilowatt hours, and further to 1000 kilowatt hours a month on July 1, 1917. making it, so far as one can determine from an examination of the 1917 N. E, L. .\. Rate Book, ab.solutely the largest initial block or step in the United states. The usual sizo of the initial block under block rates is 50 or 100 kilowatt hours a 94 Electrical Rates Lamps are a separable cleniont in cost usually provided for in some one or another rate element, but now perhaps more generally made a separate and optional part of the service of the electrical company. As regards the carrying charge on the initial and con- tinued investment in lamps on behalf of a consumer — if the com- pany owns them — that is properly a part of consumer cost. It is separable per consumer (with a qualification as regards the size of the installation) and may be so treated in the company's rates or left to the consumer to attend to directly. ^Maintenance and replacement of lamps — depending as they do chiefly on hours' use, the number of hours a lamp will burn being fairly constant — vary with kilowatt hours consumed and are properly covered by the kilo- watt-hour charge. The constituents of lamp cost are thus, after sub-division, separable on two dilTerent principles. But the lamp situation is a special question. It is best disposed of neither by sub-summing lamp cost under consumer cost nor by separately apportioning the costs involved between tliis and other rate elements. Lamp Efficiency in Relation to the Service Charge Consumer cost is significant chiefly for residence consumers and therefore for lighting more than for power uses of electricity. The straight kilowatt-hour rate has long been open to criticism as an inadequate method of dealing with the cost of supplying the small consumer. It is easy to see that the situation has not been improved by the remarkable increase in the eniciency of electric lamps of small sizes. Such efliciency is ordinarily expressed by the number of watts required per candle of illuminating power. In no other respect has electrical engineering made such marked progress in the la^t decade or so " as this of lamp etlkiency. Further improve- raents are to be expected. If the benefits of those made are already extended to coDEumers lately using obsolete carbon-filament lamps, month — to far m» the word " uxual " in nupllnililr where prartlr* vnrlr* no (frfatly. There ■r« mor« cu»f under 60 than abo\e 100. The renlderire rate In rhiUe with a flrnt block of 12 kilowatt hourn a month at 9 oenla. "In hU Pre»ldrnt'» addretii on the "Trend of Klec-trlral nps-elopmnnt " (Proceodlnjrn of the American ln»tltut« of Klertrlcal Enitlneeni, September. 1P1.'>. pa«e« 1491 1.'.02), Paul M. Lincoln makra various compariMitm for the fourteen year* prr' Incandencent lamp*, the Incrennlng u»e of which ha* lowered the use of energy for lighting purpone* In the laiit few yrjira." See general volume of proceeding* pages 1011. Reimbursement of Skparable oi; I'immk Cost 97 lessening of consumption as may result from liigluT lamp effici- encies. In connection with any change in maximum rates, it is a simple matter to give to all consumers the option of either paying (say) half a cent a kilowatt hour for lamp renewals or purchasing their own lamps. The other part-solution indicated is the ado|)tion of some sort of sen'ice charge, and with it promotion of diversified and intensi- fied household consum])tioii. It is possible that now (at the close of 1920) time has to a great extent solved the particular problem of the electrical company involved in the transition to the use of high-efficiency lamps by small consumers; or that the increase of general efficiency and the increasing importance of power uses has permitted it to be merged and lost in the general ])rol)lem of new cost levels made acute by the War. Even so — if the critical phase is now passed — so much of progressive development of the oppor- tunity to provide intensive service for domestic consumers depends upon a proper disposition of consumer cost as related to initial use for lighting that the need of a correct solution of the problem cannot be too much emphasized. The Meter Charge the Preferable Form of Service Charge What the form of the initial charge shall be must be decided largely with reference to whether there is to be a separate demand charge. For reasons to be given presently, the writer believes that, except in the case of large consumers, there should be no such demand charge. Under such circumstances it is evident that it would be well so far as possible to have a kind of initial charge that will also to some extent serve the purpose of a demand charge. Of the three possibilities open — the consumer charge, the meter charge, and the minimum charge — the meter charge is the one that has special advantages from this point of view. It is possible to class both the initial charge and the demand charge under the general head of readiness to serve. The principal difference in form is that the initial charge attaches to the consumer as such, or substantially so, while the demand charge varies quan- titively with the consumer's active connected load or some related quantity. From this point of view the meter charge partakes of the character of both, since there is an additional charge for addi- tional meters, and there may also, and should reasonably, be higher 98 Electrical Rates charges for the larger sizes of meters. Tlie tlu-ory of the meter charge is ditTerent, but its effect in relieving the kilowatt-hour charge may he substantially the same in character as is the proper effect of the demand charge. The meter charge, however, requires no elaborate measurements or estimates of kilowatt demand. Its basis, which is the prime cost of the service of the individual exclu- sive of energy taken, is different from the basis of the demand charge, which is the fixed charges imposed upon the company. It does cover some fixed charges, but it does not explicitly take account of load-factor considerations. In fact, however, as regards small con- sumers the latter are usually not directly taken account of even in such rates as purport to do so, but instead some quantity having a direct relation to the conneded load, in ])lace of the maximum demand, is made basic. It happens that meter capacity is a function of maximum demand just as much as is connected load. If the sizes of meters are care- fully adjusted to the needs of the consumer luid if their capacity is measured in watts, meter capacity is in fact rather more directly related to maximum demand than to connected load. So far as lights are used alternatively to each other — as to some extent even between dining room and living room — the meter need not be adjusted to aggregate connected capacity, but only to something considerably smaller. This situation might be used as an argument for making the meter charge heavy enough for it to relieve the kilowatt-hour charge to a greater extent than it will when based upon prime cost. It is, at any rate, a strong argument against making the meter charge relatively smaller for the larger consu- mers, at least where the kilowatt-hour rate is at the same time graduated down somewhat with reference to volume of I'onsump- tion. From this point of view, care should l)e taken to graduate upwards the meter charge. It should not be allowed to deal merely with the initial cost of the small consumer, on the assumption that it will be relatively negligible for large consumers — until a suffi- ciently large sized and otherwise sulliciently distinct type of con- fiumcrs is reached for them to be entitled to a different type of rate. As to the scale of the meter charge, as has alrea«ly been sot forth, .50 cents per month for a consumer having a single meter of the smallest size class would seem to be (or to have been, before the War) the appropriate round number under ordinary conditions in Reimbursement of Ski'ahahi.e or Prime Cost 99 a Iar<;e city. For detached residences the appropriate charge may he nearer $1.00. Care should ho taken in such cases, however, not to mingle density-factor with consumer-cost consideration.s, especi- iilly if the former can be dealt with in other ways. P.ut it is not the purjjose of the writer to draw the line with exactness between meter or consumer cost and other cost elements, if indeed it is necessary under a differential system of rates to do so. Tiie charge for additional meters should be at the same rate as for the first. For larger sizes, the charge should be increased, probably in rela- tion to wattage, or possibly to amperage." The situation as regards high-eihciency lamps has a relation to the position here taken that the meter charge is preferable to the minimum charge. If the company is reimbursed for consumer cost, it is therel)y freed from important checks upon the extension of business where it should be extended and not elsewhere. If, on the other hand, the consumer feels that what he pays per kilo- watt-hour is for kilowatt hours, his attention will be called to the economical use of energy, not only negatively in the sense of using as little as may be per service unit (per candle hour, for example), but also positively in the sense of extending its use under encour- agement from a low kilowatt-hour charge by adopting additional electrical appliances. The kilowatt-hour charge will naturally be less of a check upon consumption when accompanied by a meter charge. This, it is true, is an advantage of the meter-charge only over the minimum-bill method, not over the consumer charge. In relation to the last the advantage of the first method is rather a matter of the need of some substitute for a demand charge, having a least educative value. The adoption of a consumer or meter charge seems to be about the only way of avoiding discrimination in dealing with the small consumer. Otherwise there is opportunity for debate as to whether the companies suiter directly more fi-om the costs per consumer not fully compensated as such, or gain indirectly more by keeping kilowatt-hour rates unduly high for a broad range of small consu- mers, usually including long hour users. ** The cost of the meter, which is the most important single element in a consumer charge, may be ascortaiiied from the price lists of the manufacturers, but the appropriate discounts should be applied. The 5-ampere meter is by far the predominant size. After adding the cost of installation, as in its nature also a capital charge, the investment in the meter of a small consumer is (or was before the War) perhaps $10.00. 100 Electiucal Rates As a method of insurin;^ tlu> coinpany scmn' roturn for tlio ser- vice that is rendered apart from kilowatt hours supplied the meter charge is preferahle hocnusc it has a direct and consistent relation to cost. Even as repirds the concession made to public prejudice under the minimum-bill method by allowing the consumer to take kilowatt hours up to the amount of such bill without alTecting the total amount charged, thus making it appear that it is at his option that he pays for kilowatt hours that he does not receive, that fact, after all, is not much of a consolation whore, for example, the con- sumer may have been out of town. It would seem to be better to take pains to educate the consumer through the meter charge as to the nature of the cost of electricity — incidentally obtaining other advantages — than to have the initial charge accomplish but a single purpose and that crudely.** The minimum bill will naturally be larger than the consumer or meter charge because it takes care of initial kilowatt hours as well as of consumer costs, though of the latter only verj' roughly. The fact that it is absorbed in the kilowatt-hour charge, however, makes the roughness of the adjustment less noticeable and less objectionable to consumers. In the above discussion of the minimum-bill metliod of dealing with consumer cost it is assumed that the minimum charge will be upon a monthly rather than an annual basis. In actual prac- tice the latter basis is commonly preferred." In effect, this exempts " The tint report of the Rate Reaearcb Committee of the National Electric Light Amo- elation unanimouxly approved the minimunibiU method, that is " minimum charge per month or i>er year." See Convention proceed I nifii, lUll, vol. 1, p. 318. Hut tlic nitema- tive tiie Committee hsm in mind is tlie un(|uuliMed meter rate. Its rec-ognition in tlii« reference of the importunt bearing of hi|{h elllciency lainpv on the oituation !■ Rigniflcant. The recommendation of the minimum bill in rcitrrnted in 1910 (Convention proceeding*, general vol., p. 222). " The altuatlon at the close of lUl'i an rcicardN opinion ami practice in thin reiiprrt it ■ummrd up by the Committ4-e on I'ublic Utility Hat<-ii of the National AMOciation of Railway Commiuioneni a* followi: " In a few ca»e« only have commiKtionii conHidered thn cjuention of yearly or monthly minimiimii. The Mu«-<;ii huM-ttjt Cbn and Kle<-tric ('n rW-tric ('aiM> ordcrnl a minimum cliarK)' to hr ailjiii>t«e aaid on both aiden. In tlic instant cajic, Reimbursement of Separable or Pkime Cost 101 from tho cliarfje any coiisunior who bikes (say) $12 worth of cur- rent a year, regardless of whether his consumption is spread evenly through the year or is disprojiortionatcly large in winter (and at peak times) and too small in summer to pay the consumer costs that are about equal through the months of the year. The point is of course interesting in principle rather than practically impor- t-ant. A separate meter charge does not so readily lend itself to such an ineptitude. In effect such a minimum charge upon an annual basis amounts merely to a guaranty of $12 a year from eacen taken, instead of bt-iug made merely a matter of time. 16 Kate Henearch 880-2. *• The following from the opinion of tlie New Hampshire ComniisMion In the C^oncord |ra« ra*e U ii^ilflrant and c<>rre.h meter and equipment for mrasurinu k»m a* mui-h aa It la the bunines* of a grwer to furnish M-aleti for weiKhinn out rowIs for hia curtomern The dll!'Ten<-e which In controlling la that each gat ctinhumcr baa a meter on hU own prembe*. which Is reserved for hla particular UfcC and can be used by no one elue, whcreaa the name acalea are used by a large number of cuatomera. and it would be Impractical to make a diarge to each cust^jmer, thouKh of course the u»c of the acalea la paid for by the usera . . . . aa truly aa if It were made a apcclal charge to each Individual cuatomer. 13 Rate Research 260. RETOBmiSEifENT OP SEPARABLE OR PriMB CoST Kl3 for the somewhat sinister fact that the latter are commonly po designed that most consumers have no practical acquaintance with anything except the first block. It should be noted that the meter charge as favored by the writer is not a third rate-element but is, instead — as will appear in Chapter V — regarded as in part a substitute for the demand charge in the case of the small consumer, for whom, because of administrative costs or discriminatory incidents of the methods in use, it is considered undesirable to attempt to apply load-factor rates. There is a further aspect of the argument for simplicity. The dealings of the supply company with the consumer should have regard to keeping consumer cost as low as possible. The making of lamp supply a separate matter is a step in this direction. The prepayment meter may assist. The practice of requiring a deposit might be so developed as to make the reading of meters and collec- tion of bills oftener than quarterly unnecessary. Although the minimum-bill method is more generally employed by electrical companies at present, there appears to be a definite tendency towards the more specific service charge.*^ Dynamic economic considerations, or regard for progressive development of the uses of electricity, favor the employment of the meter or consumer charge as against the minimum bill. Load- factor considerations suggest the meter rather than the consumer basis. It is more important that consumption be diversified than that small consumers for one use only and without elasticity of economic demand be served extensively at less than their separable cost. But a small consumer who is potentially a larger consumer obviously does not belong in this class. And no consumer whose patronage is in doubt should be loaded with uniformly pro-rated fixed charges. This is the topic next to be dealt with. " The Committee on Public Utility Rates of the National Association of Railway Com- missioners says : " The trend of opinion at present seems to be to some extent towards a ' senice charge ' instead of a minimum charge." 1917 Convention Proceedings, p. -155. ciiAi'Ti:!; i\" CLASS RATES AND RATE-DIFFERENTIATION Classification the most familiar moans of differentiation. Meaning of "differentiation." Prirc differences not its essence. The unequal loading of fixed charpe.s and overhrad cost.s, in place of pro rating them, the essential point. Graduation m.ay be without differentiation. In a variety of modes differentiation is the gist of the electrical rate question. Class rates, especially the power rate. Most electrical rate classification is based upon load-factor considerations. Competitive sources of power not important for small users. Long hours' use and daylight use. The latter now of little importance in large centers; residence lighting less on the peak. Permanent advantage of power relates to .'•easonal variation. Grouncis for a class power rate are no longer strong. Disadvantage of power in respect to the " power factor." Class rates in general. Employment to stimulate new and developing business, but with favorable load characteristics. High-tension current in effect a different article. Occupational cla.>y the railroads especially, and is generally recognized as typical of difTorcntial price-making. But first there is need of stating what is meant by the term. Meaning of " Differentiation " If by differential rates one means a diversified and complex sys- tem of prioos, inoludin;: difforonoos not conformable to the quanti- ties of commodities and services dealt in as these are physically 104 Class Rates and R.\te-Diffi:rf:ntiation 105 measured, it is evident that electrical rates are decidedly differential in a variety of ways. The clapsificatioii of service and the making of difTcront rates per kilowatt hour for the diircrent classes so constituted is only the most obvious mode of differentiation. The purpose and effect of sueli " class rates " are to he considered in the present chapter. But the mere existence of such price differ- ences is not the essence of differentiation, and it is important to understand the fundamental character of the latter before attempt- ing to pass judgment upon this particular mode of differentiation. By differentiation the writer does not mean the mere making or existence of systematic differences in price, even when such dif- ferences are based upon something other than differences between the goods or services for wliich compensation is received — though this is a familiar external aspect of differentiation. The essential fact is rather tlie disregarding of separable costs and of the arith- metic of aliquot parts in the apportionment of fixed charges with reference to their recovery from consumers. Stated positively, it is the loading of such costs unequally (as opposed to uniformly per commodity unit or per objective service unit) upon the various classes of consumers, such loading having reference to increasing the volume of business transacted rather than reference to col- lecting " full compensation " — whatever that may mean — for the entire cost of each article sold or service performed. Separable costs should be repaid by each consumer, but joint, general, or overhead costs, may be differentially distributed, so that some contribute much and others little. This practice is contrasted in idea and method with pro rating, where the result is a matter of physical facts and simple arithmetic, instead of being a matter of commercial policy. Differentiation may be accomplished by the simple graduation of rates. But if the graduation conforms directly to the variation of cost, as it is generally supposed to do in the case of wholesale prices, the rates are not differential in spirit and should not be so named. At least such a case should be qualifiedly described as external differentiation. True, it is impossible in practice accu- rately to draw the line between the two, but clear thinking requires the recognition of differential rates and graduated rates as dis- tinct and different things, even though one may sometimes be 106 ELECTTiirAL Rates in doubt as to whether a particular rat(> belongs more in ilie one or the other group. Tlie various modes of difTerentiation are nowhere more com- prehensively represented than in olectrical rate practice. The legal and administrative status of the three modes to be considered — classilied service, quantity discounts, and demand charges — is well enough established, though most public-utility commissions show some reluctance to meet the general issue squarely. That issue — tlie problem of determining what degree of dilTerentiatiou is justi- fiable in principle and what are the practicable w'ays of applying the principle — is the gist of the electrical rate question. Even in such phases of electrical rate-making as are conmionly assumed to be founded upon hard and fast analysis of cost, we shall find the real question to be whether this or that peculiar feature or element of a rate schedule is an organic part of a well considered differential policy or not. But classification, as the most familiar mode of differentiation, is first to be considered. Class Rates, Especially the Power Rate The classification of customers according to the use to which the energy is put, or according to occupation, is a common feature of electrical rate schedules. The analogy of freight classitication by the railroads immediately suggests itself. The basis of freight classification is, in no necessarily invidious sense, " what the trafhc will bear." The same principle, of course, finds expression in the cla.ssification that appears in electrical rate schedules. There is doubtless some tendency by this means to encourage new uses of electricity and to initiate new classes of users. But this policy is more likely to find expression through pushing certain consumer's appliances. Altogether, use and occupational classifications have l;een based more upon load-factor considerations than directly upon the desire to expand business by such means. The most important and most general Mpplii iition of the method of classification is observed in the distinction between lighting and power rates. This involves separate metering of cnorgy used for motors and means in practice the concession of a lower rate for such a use than for energy not thus separately trcatml. In tha same way a special rate may be granted for storage-battery charg- Class IRates and Rate-Differentiation 107 ing. The power rate is old and, where the distinction is still justi- fiable, must bo referred mainly to load-factor considerations or to the supposed ]on<]^ hours' use of the maximum by motors.* It is possible that something might be made of a claim that it is necessary to give power users a low rate because of possible sources of power other than electrical. But in the case of power for small units, the superiority of electricity is so great that com- petition is not effective; and, in the case of very large users, the possibility of an independent supply is often no more important for power than for lighting. Indeed, even for the small lighting con- sumers there is an available substitute in the form of illuminating gas that might logically be expected to cause the electrical com- panies to favor that class of business. In some cases they very likely do as much as load-factor and other cost considerations per- mit. But it often happens that both gas and electricity are supplied by the same company or else by associated companies, under which conditions the electrical company may make no effort to extend its business among small consumers, leaving them to the associated gas company. Altogether, aside from load-factor consideration, the special power rate is traditional, rather than generally adapted to present conditions of electrical supply, at least in the largest population centers. Unless there is something intrinsically advantageous in a class rate as compared, for example, with a load-factor rate — a question that does not call for discussion — the consideration of the power as distinct from the lighting rate in practice relates to consumers of small and intermediate size, since large consumers can be better taken care of by load-factor, and possibly by density-factor, pro- visions. In fact, distinctions between power and lighting are often not made at all in the case of wholesale consumers (unless on account of the power factor) . In the matter of lamp supply, more- over, the large consumers are likely to prefer to attend to their own needs, even if the small ones do not. Hence the following * The unnamed writer of the section on the Development of Electrical Rates in the 1918 report of the Differential Rates Committee of the National Commercial Gas Association (page 28) disposes of the origin and recent history of the power rate with the statement, which is perhaps too off-hand, that the power rate was originally started as half the lighting rate and that there have been two theories followed in its adjustment to changed conditions, one that the rate originally made contained a sufficient concession to " value of service," so that the lighting rate is gradually to be brought down to the power rate, the other that the 50 per cent ratio should be maintained in making reductions. 8 108 Electrical Rates remarks deal with the power rate in rehition to oomparatively small consumer?. The most .ueneral arijuiniMit l"<»r a distinct power raif, lower than tlie ordinary lighting rate, is the long hours' use of the jiuwer demand. It is, also, possibly still true in general, though of doubt- ful validity for the largest urlian centers, that the daylight load is comparatively small and tliat therefore power can be taken on at very little cost per unit supplied. This argument rests ujjon the supjjosed diversity of power uses. In fact, however, the power demand is less likely to be ofT the peak than residence lighting, which constitutes most of the small lighting. Where the peak comes before six o'clock, residence lighting consumers are not more re- sponsible for it than power consumers. But in most large cities, the winter peak does come before 6 and even before ."> P. M.' Tiiis situation is now developing further because of the nuuh reduced consumi)tion per candle hour of the most recent types of lamps. If, owing solely to the great increase in the efficiency of lamps, the relative imi)ortance of lighting as a contributor to the system peak may soon become half what it has recently been, the tacit assumption of many discussions of electrical rates, namely, that the lighting consumers make the peak, will then become abso- lutely untenable. If small consumers at the same time come to apply electricity more liberally for motor and cooking uses, diver- sity among them will take care of their contribution to the com- pany's load factor, so that not much direct attention need be given to this question in devising a rate schedule for them.' Even now there is not much ground left for making a distinction between small lighting and small power consumers. While tiie load-factor of the latter is better, the diversity of the former is not only better, but doubtless increasingly better. The diversity in qiic-ilidii, bitw- ever, ha« regard largely to diurnal variation. Only Eft regards the seasonal variation of the load has power commonly a permanent advantage in comparison with lighting.* * 8«e thp loacl run« ol>ovr, tiaicmni ii.rv. (.at irreatrr extent of uw of ira* for rooklnjf In nurnmer limn In winter, the • I-.. .■:,'. -..ir I. I, of the drmantj fur the two ornlrm ReeniN to be inil>»tantlally lilentlral, ^ ir.i>t»T 1m II. If d'-trnnined hy the variation In the mipply of natural light. See the dl»- 'i of thi« tojiln (with dia^rrani) In the Anniwl Krport of the New Vork Publio Service C'(.'tr.iiii-»i'ir. fnr thr Kirrt Iiiariit f..r 1I»I4, vol. HI, pa^es 72-78. Class "Rates and TJate-Diffehentiation 100 A lotul-fiictor rate of tlio il(.j)kiiison type on an annual basis, which should l)e available for large consumers, will be duly influenced by this characteristic. Thus the large })ower consumers can be adequately provided for without separate classification. Neither Wright nor llopkinson rates, if on a monthly basis, concede any- thing to power for its seasonal constancy. As regards small power consumers (and other small consumers), wdiat seems to be needed is some concession on account of extra summer use. This, if desired, could be effected by granting a specially low rate on account of energy taken between April 1 and October 1 equal to or in excess of the average amount taken during the six preceding months. This would operate to encourage occasional heating and cooking uses, when fires are not regularly wanted, as well as summer power consumption. The seasonal variation is administratively much easier and simpler to deal with than the diurnal. The fundamental distinction of electric-supply classification, that between lighting and power rates, is based upon load-factor considerations and also upon the assumption that the lighting demand will constitute the peak. This assumption no longer holds good in large cities under developed conditions of electricity supply.* We may in fact expect a gradual reversal of conditions under the influence of factors whose importance is already estab- lished. Moreover, if, or so far as, the favorable load characteristics of a consumer may be directly determined and recognized in the rate given him, the clumsier class-rate method should be regarded as a makeshift to be superseded as soon as practicable. But if this statement is true of the most important of classifica- tory distinctions, then it is reasonable to suppose that the classi- fication of service will gradually cease to be an importiint method of electrical rate-making, except possibly in small towns, being otherwise appropriate only for experimental and provisional rates designed to develop, and determine the characteristics of, some one or another kind of new business. However, whether the writer's » Mere proportion betweemon- strably practicable as a cooker, and wliich — if the present genera- tion sh.'pt in unhealed rooms — would doubtless l»o found superior (though to be used with care) to any of the bedwarmers our grand- mothers used. The same lamp socket may also be used to nin an electric fan, a washing machine, or a vacuum cleaner. In fact no scheme of classification according to anything that approaches final or definitive use can be consistently applied in electrical rate- •4 W. R O. R. 747. Tlif WIvwndn Coftimlwilon. In it* ilptomiliiation of perrontago of connected load drrmcd to be active^ conaittcntly BMifTu high nitio« for povror. Class Rates and RATE-DirFi:iu:NTiATiON 113 making." And if some ])rarti(ahl(' iiiflliod could he devised, the desirability of diversity of use would condemn tlie policy as re<(ard3 small consumers especially, and would make its wisdom doubtful even for large ones. With large consumers use classification can be carried out, but only by the employment of separate meters, by frequent inspection of consumers' premises, etc. A related difTcroncc between railroad and electrical rates that calls attention to a further difficulty with use classification in the electrical field consists in the fact that railroads in handling freight do business with dealers instead of mainly with ultimate consumers. Dealers are familiar with differential practices and will seldom object to the principle, as distinguished from unfair or vexatious applica- tions of it. The electrical company, on the other hand, comes into conflict with the moral sense of the consumer when it tries to dis- criminate between uses that are all mere varieties of the applica- tion and enjoyment of a homogeneous supply of energy that is administered by the consumer himself. In order that rate classification appeal to the general sense of justice, it must avoid arbitrariucr^s. This means that the lines of division between classes should be distinct and definite and that they should leave no room for douljt as to the class in which a consumer properly belongs. The problem is simply the very general one of putting like things together. While it does not necessarily follow that there should be no attempt at classificatory separation where grades shade into each other, it is evident that much care should l)e taken with distinctions of this sort. If two classes do shade into each other by practically continuous steps, the character of the change in the rate should be of a similar nature. The superiority of tlie block over the step type of quantity-discount rates rests upon this principle. While the step rate is distinctly a class rate, it might be argued that the block type represents an abandonment of the class-rate principle. However, this may be regarded as merely a matter of definition. Xeverthelcss. the weakness of the step rate '" The classification of a motor-grenerator set used to operate a moving picture machine has been the occasion of confusion in the minds of some commissioners. The energy bought is applied directly to operate a motor, but it is u.trd for lighting. The X. Y. 1st District Public Service Commission decided that the classification should be as power (1916 X. Y. 1st Dist. P. S. C. R., 162). Montana and Ulinois Commissions decided that the ultimat« use governs, while the latter recognized that the long-hour service may constitut* a claim for a lower rate. 1917 Rate Research Committee Report, page 182. 114 ELECTniCAL Kates in this connection is a weakness of class rates generally. The group for which a special or class rate is made should, for the l)est results, be definite and easily distinguished — a distiiu-t type of consunifr or of use. But the conveniences of the electrical companies (or the neces- sities of the case) cause averages to be tlie main reliance in devising class rates. A large group of consumers is ranked according to its average standing, in particular as regards the average hours' use. For example, on the average, saloons made a more intensive use of their installations than grocery stores. Would it not be better, however, to let the rate vary with actual performance within each class? Some grocery stores surpass others and some of them may surpass some of the saloons in respect to the amount of electricity used, for example, per foot of floor space. A class rate based on averages is not economically speaking dynamic in its efTect; it does not stimulate intensive use. It is not even quite fair as between consumers thus lumped together. It is worth noting that such rate classes based upon averaging may be worse, or more discriminatory, than step-rate classes, because it is only near the class boundary that injustice occurs under step rates, and the injustice may be made practically negligible by the employment of numerous small steps and the narrowing of the range of each class. In the case of class rates based, for example, on occupation, it is quite possible that most of the members of a class have load factors — supposing the underlying principle of tlie claRsification to be of this nature — nearest to the type for other classes that obtain higher or lower rates. If a step rate is properly considered as by nature discriminatory," the class nite is ordinarily more so. Rate schedules often show "optional " alongside of regular rates, that is, under certain conditions consumers may choose whether they shall be charged under one rate or another. Whore the straight meter rate is long established and general it may be well to permit (rather than compel) the consumer who is in position to respond to encouragpmcnt towards long hours' use to be billed under a load- factor rate, even though it w(»uld not be adviHai)le to attempt to put " C(. pag« 47. abo^*. Class Eates and T?.\TK-DiFFEnENTiATiON 115 into effect for small consumers generally any such rate." The exer- cise of such an option amounts to self-classification, hence its men- tion in the present connection. Such a method of constituting classes is in principle thoroughly sound. If the rate schedule is honestly made u]) and only reasonahle limitations are put upon the exercise of options, discrimination is practically eliminated. Difficulties with drawing the lines between classes do not exist. There is no arbitrariness. If two consumers with identical char- acteristics are found in different classes, this situation does not result from acts of the company. The consumer can take advan- tage of a change in his conditions of consumption by promptly changing his class. He may be definitely stimulated to a more intensive use in order to avail himself of a load-factor option. Optional rates are also serviceable to the company as a means of experimentation with new adjustments and of acquainting the pub- lic with new devices. Carelessness on the part of the company may involve an abuse, namely, a customer may be not duly informed of his right and interest to exercise an option that is undoubtedly to his advantage. The company has a duty to perform in this connection. Whether a customer should be allowed to exercise his option after the fact, that is, with reference, for example, to a month just passed, is another question. For reasons of administrative convenience, in general he should not. And he should not be allowed to shift back and forth between rates at frequent intervals. However, any restrictions upon the choice of the consumer should be clearly stipulated and not a matter of afterthought on the part of the com- pany. All the optional element properly rests with the consumer until he is given due notice of a change." This brief review of certain methods of differentiating rates bv way of the classification of service is important chiefly as indicating the impossibility of arresting one's attention and interest, whether practical or theoretical, at this aspect of the matter. Systems and methods of classification point chiefly to load-factor considerations, " The 1917 Committee on Public Utility Rates of the National Association of Railway ConlIni^;sione^s nays : " A block rate meter schedule should be supplemented by an alterna- tive (optional] demand schedule." Convention Proceedinp?, p. 453. " An option cannot be withdrawn by the company without due notice. A New York 2d District decision on this point is given in 14 Rate Research 332. 110 Electrical Rates which constitute the principal distinctive charac-t 1.40 1.44 '• feH'T 4.30 1.00 1.9.1 1.15 " " Hub-tiition 6.02 2.19 2.24 1.32 " " generator 5..')2 2.41 2.40 1.46 It should be noted that in the " large-user " class diversity in a broad sense in important ns between various applications by the same consumer. IjOad-Factou Rates 129 According to the definition wo cannot speak of the diversity fac- tor of an individual, since the concept supposes a group of con- sumers. But, with reference to the relation of the period and amount of the individual's consumption to the system (or other group) peak, we may speak of his characteristic diversity. The individual's diversity may be conveniently defined numerically as the ratio of his total consumption per day (or per year) to his rate of consumption or his " demand " at the time of the station peak. To make this ratio conveniently comparable with the load factor the individual's demand at the station peak hour should be the unity term of the ratio. This second quantity may appropri- ately be called the consumer's " simultaneous demand." * A con- sumer's requirement at the time of the station peak may be on the slope or even in the valley of his load curve. In strict logic the diversity ratio ought to be understood in place of the consumer's individual load factor in most theorizing about the relation of the load factor to rates, especially as regards writings published prior to the general recognition of the importance of diversity. An alternative mode of expressing the relation of an individual's consumption to the central-station peak is the ratio of his maxi- mum demand to his demand at the time of the station peak. It has been proposed that this be called the individual diversity factor." But this conception attaches importance to an individual peak that is usually to be provided for under off-peak conditions — an operat- ing problem, and a simple one except for the very largest consu- mers — while the diversity ratio is directly a measure of the indi- vidual's contribution towards raising the level of the valleys. In one respect it is necessary to qualify the statement that the electrical company is interested in the individual consumer's diver- sity ratio rather than in his load factor. It is his load factor that determines the necessary capacity of his service connection and, » " Simultaneous peak " is the not altogether appropriate tenn used by H. E. Eisenmenger in an article in the Electrical World, May 24, 1913, vol. 61, P. 1085, entitled The Theoretical Basis of the Multiple Rate System. This and other articles of the same writer are char- acterized by an interesting use of tri-dimensional diagrams. Of. his contribution incor- porated in the 1911 report of the Rate Research Committee, N. E. L. A. Convention proceed- ing, 1911, vol. 1, p. 291 ; also. Some Geometrical Aspects of the Three Charge Rate System in the Electrical Review and Western Electrician, 1911, vol. 58, pp. 280, 332, 384. ^* H. B. Gear, " The Application of the Diversity Factor," in the technical volume, pro- ceedings of the National Electric Light Association, 1915 Convention, p. 245; also at p. 358 of Gear and Williams, Electric Central-station Distributing Systems. 130 ELECTnicAL Hates except a^ the broadening of iiroui) divi-rsity niTocts tlie situation, of the other means of siipi)lyiii^ a 1 Q 96,078 5,280 2,220 960 3,280 8,680 ! 1,550 480 2,170 1 340 I 650 I 6.030 ! 4,400 90 720 980 1,550 830 3S0 20 260 540 26,640 9,770 880 2,130 240 2,300 2,130 720 100 2,160 80 660 6,490 37.8 528.9 31 8 20.4 42. 4| 31.6 99.2! 29.6 67.1 24.0 73.81 39.2 46 6' 35.6 6097. 2! 56.2 I 72.0 55.0 20.0 16,870 806.0 112.3 72.0 41.2 The general diversity factor is 2.7. 133 Electhical Kates consumer's peak occurs at about the same time as tlie company's peak, and that lonpor liours' use will mean additional use at other than peak times; but when there is diversified use and, in particu- lar, a heavy daylight load for various applications of power, the diversity of the individual consumer can no longer in justice be disregarded. Then it becomes imj)ortant to pay attention to the relation of an individual's consumption to the system peak rather than to the shape of his individual curve. It is possible, for example, that in our largest cities the domestic lighting consumer has come pretty generally to take practically all bis electricity at off-peak times, with reference, that is, to diurnal peaks. Such consumers may tend to reduce the station load factor wherever the daylight and twilight demand account for most of the consumption of elec- tric energy. Diversity may, it is true, be taken into account in the method of determining assigned maxima — as also, of course, through the classification of consumers — but such a method is rather unreliable. But it is self-evident that, if all consumers had individually high load factors, the company supplying them would inevitably have at least as good a load factor as they have, hence the load factor of the consumer may well be a basic fact for the rate schedule. The demand charge, however, should be modified with reference to diversity. Seasonal Variation as a Load-factor Consideration With reference to the extent to which sea.sonal as well as diurnal variation of demand is to be recognized, the method of determin- ing the demand is worthy of more attention than it ordinarily receives. The Wright rate on a monthly basis, supposing the peak is actually determined instead of being arbitrarily assigned by classification, disregards the seasonal variation." The demand ele- ment in the total charge is, under such conditions, based upon a new maximum for every bill rendered. Hence, for the year, the demand upon which this element in the rate is based is in effect the " ARain it in neretihury to rpmltid th'- roiuIiT thiit this fhiirnctorlstio of tlip Writjlit rate r-s actually applied in thiw country in not (Hjuntcnatifcd by the ideas and practires of Mr. Wrijcht himiielf. It uppf.irs that at Uri({hton he tof)k an the ronsunier'n iiiaxinnim the avera;j;e of monthly pcaicH for the six winter nionthM. (See the 1800 articln.) He also allowed a residence coniaimer who planned to gi\c an evening entertainment to have the demand indi- cator iwitchcd out that evening for a nominal fee. Load-Factor Eates 133 average of twelve monthly maxima, instead of being the largest of them and the one that, in theory, decides the kilowatt l)urden on the supply enterprise. Under these circumstances, with a given yearly maximum, the smaller the other monthly maxima, and pre- sumably, therefore, the smaller the off-season consumption, the lower the aggregate demand charges for the year. This situation in effect moans the exemption of the consumer from paying the cost that his seasonal, as distinguished from his diurnal, load-variation imposes. The Hopkinson rate for large consumers, on the other hand, is in practice likely to be put on a yearly basis, so that the annual (winter) peak affects the rate the year round. This prop- erly asociatcs the demand charge with the necessitated fixed invest- ment. The sharpness of a peak (resulting from diurnal variation) is of course an important factor also. But the relative importance of a yearly peak is a function of daily as well as seasonal variation. The demand element in a Hopkinson rate, which it may be assumed relates directly to the yearly peak, thus reflects the influence of both annual and diurnal variation of demand. The bearing of the bill period upon the variation of the average rate per kilowatt hour is of interest, not only in relation to whether the maximum (if a factor in the rate) is determined for the month or for the year, but also in relation to whether quantity discounts according to kilowatt hours taken are granted on the basis of monthly or yearly consumption. If the discount depends upon monthly consumption, the greater the unevenness of the consump- tion, the lower the average rate. This effect, however, is not likely to be of great practical importance in terms of revenue involved. With regard to the chief factor determining tlie variation dur- ing the year in the amount of energy consumed per month, that is, the duration of daylight, if the peak for domestic lighting is retarded from winter to summer by only an hour and a half, and for other lighting correspondingly, and if the average hours' use of the actual maximum is as small for lighting as is commonly stated, the range of variation on monthly bills during the year, even without assuming vacations or shut-downs, must be very con- siderable. Tn the latitude of ISTew York the range of variation in the need of artificial light as determined by the time of the sun's setting on the longest and shortest days of the year is about three hours. If the time of lighting up residences ranges between 5 : 30 134 Elkcthical Kati:s and 8:30 P. M., and if the time for extinguishing the lights is typically 10:30, then the quantity of energy required might be expected to show a seasonal variation from minimum to maximum, due to this cause alone, in the ratio of 2 to 5. Diversification, even with reference to the lighting function only, will of course con- siderably reduce this range of variation. But with reference to this factor of seasonal variation considered by itself, the range evi- dently nearly equals the average consumption per month. If the range in question happens to equal this average, and if the average happens to be in the neighborhood of a change from one monthly block rate to another, the consumer will get the benefit of the lower rate to the extent of about one-eighth of the energy, merely because of his seasonal irregularity, by reason of which he takes more than the average quantity in winter when the kilowatt demand on the company is especially heavy. Furthermore, since he is a lighting consumer, his additional consumption is likely to come at the peak time, that is, at the close of the winter afternoon. Yet practical rate-making pays little attention to this matter, doubtless because it is so convenient to close up the consumer's account finally for each bill period." For large consumers, at any rate, this should not be done, even if only with reference to the educative value of a more scientific adjustment with regard to seasonal load-factor con- siderations. To illustrate the point more in detail — it is not mathematically correct to reduce the annual to a monthly basis as is done for {)lot- ting purposes in order to compare the Cicneral and the Wholesale rates in Figure 5, presented at page IGO, below. The diU'erence between the two bases in favor of the General rate may be illustrated by an example. A consumer under this rate with an average cou- sum])tion of (j2.")0 kilowatt iiours a montii will, if his consuniijtion is only !•ini; hourii and In othf-r caKe* the leavinR of employoos nt half-hourly intervald, •Iwayf with due reffard to their ofTeft on the included Ntrrrt- railway load. It hiu been eatlmated that " utatrifered houm " would wive ITi.OOO kilowatt* of demand at no«toii (Electrical World. .Nov. 10, 1018. paK" 040). "Compare an to the control of pmkK on th*- i-lrctrlflfd portions of the ChiraKo, Mil- waukee & St. I'nul Ry . F. f Pratt In the Klcrtrical World. Oct. 4, 1910. paife 753. ••Compare William* k Tweedy. Commercial KnitlnecrinK, pn((<'fi 7.1-70. " It if «tat<>d that Cti'% of artificial Ice In Chicago In made by cent ral-(.tat Ion energy, which U 28.6 per cent of all Ice uned there, including natural. Elpctri<-al World, March, 1919, paice 800. "The rate achedule* of Detroit, Michigan, and rif no<-h<"Kter, New York, contain fea- ture* that attach Importance explicitly to diversity, the foniier by w.iy of time differ- entlali for auxiliary and emergency iicr>lce, tho latter by way of qiinlincation of the demand charge for recorded peak* with reference to their time of occurrence. Load-Factor Rates 147 large consumers ought rapidly to take fairly defmite aud fairly uniform shape. The appropriate load-factor rate for large consumers, as is abun- dantly indicated, is of the llopkinson rather than the Wright type. The decisive consideration in favor of the former is clear in the light of the importance properly attaching to diversity. The Hop- kinson type of rate lends itself to the substitution of the diversity- ratio for the individual consumer's load factor (his " simultaneous " demand for his maximum demand), and also to any desired com- bination of the two. Lighting fur commercial purposes would, under such a system, be made to pay for its usual bad diversity ratio as well as for its bad load factor. Load-factor considerations applied to determine the proper rate for large consumers should be administered partly with reference to giving such consumers their share in the lower costs, but more particularly, from the public viewpoint, with reference to safe- guarding the company and the public against undue concessions to bargaining power. To give those with special bargaining power carefully all that is their due by means that are unambiguous, tak- ing nothing for granted, is the only way to be sure that such con- sumers do not get more than is their due. But from this point of view the density-factor feature of rates, to be considered in another connection, is of at least equal importance with the demand charge. Load-factor rate elements sliould not be used to disguise quantity discounts, and vice versa the quantity discounts should not be made specious by arguing from an assumed but not determined load factor. It is true, for example, that the large consumer will in general have a somewhat better load factor than the small consumer, but the fact is irrelevant and the argument merely specious if the better load factor results from a degree of diversity of use in the case of the former only such as would be matched by the diversity factor of a number of small consumers, taken at random, having an aggregate consumption equal to that of the large consumer. As to consumers intermediate in size, it may be desirable to en- courage oflF-peak business by various methods not requiring the use of load-recording meters. An outright concession to power uses may sometimes be made, though it should not be large in amount and should not depend on volume of consumption. It may be ex- 148 Electrical 1?ates pected ultimately to disappear. Other sorts of consumption that are easily ascertained to be od'-pcak are entitled to similar conces- sions." Furthermore, without direct reference to size, a consumer who is willing to reimburse the company for the expense of the special metering should be allowed the benefit of load-factor dis- counts. In the case of the large whole.-^ale consumers, on the other hand, the expense of such special metering should not be the occa- sion of a special charge, since it is incurred quite as much on be- half of the public as of the consumer. In brief, load-factor discounts should be designed to make busi- ness grow in the right direction qualitatively as well as quantita- tively. In order to do this honestly and elfectivcly they should not be mixed with quantity discounts. The Differential Character of Load-factor Rates The subject of load factors is discussed as a phase of the cost of electric supply. This is the correct viewpoint. The distinction between running or variable costs and lixed costs is of general validity and of the greatest significance. But this statement does not mean that the distinction can be accepted without qualification or as something in its nature absolute. The variable costs readily lend themselves to analysis and allocation per unit of product. The fixed costs, it is usually assumed by engineers, lend themselves to similar analysis, but the unit is the kilowatt of demand. If it is entirely true that kilowatt fixed cost can be so separated, then load-factor rates are not differential. But engineers and others interested in the separation and apportionment of costs to dbtain unit figures are seldom prepared to appreciate the limitations upon such analysis that arc implied in the theory and pracfice of difTer- entiation. And the same engimiT tli.ii ciirrics his bard and fast cost analysis to the extreme h'mit may, as the manager of an electrical company confronted with competition, carry the practice of difi'er- entiation to equal extremes. The fact is that a figure of cost of fuel per kilowatt hour generated and a figure of cost of generating plant per kilowatt of generating "A " limitiT " mny he twed to prevent px<-ckh demand on flio part of a nnall consumer. The Orejron fVimmlwion has approved a rnt" (for Icemakitiif). allnwinir n fiO per rent dliirount on that portion of the o<-)nRumT'« df-niand not used between 4 and 8 P. M. during the four months Nov.-Feb. 10 Rate Research 101. Load-Factor Rates 149 capacity have not the same relation to tlie charge per kilowatt hour and that per kilowatt of maximum demand, respectively. In a general way, the coal burned varies with the kilowatt hours pro- duced, and even though this be true only in a general way, it is a firm foundation for rate-making. That the central-station capacity is a function of the maximum demand of consumers, or varies with the consumers' demand, is not true in anything remotely resembling the same sense. If it were true that generating capacity must in- crease in proportion to the aggregate consumers' demand (even though a decrease in such a demand could not be reflected by a decrease in capacity) the functional relation would hold sufficiently for the purpose of basing rate-making upon unit fixed cost. But the consumer's demand, as ordinarily defined by reference to his in- dividual peak, has no necessary relation to the kilowatt burden he imposes on the central station. The significance of the diversity factor in this connection need only be mentioned, since it has al- ready been fully discussed. Even if one wished to define the consumer's demand as his kilo- watt requirement at the time of the station peak— which engineers are not generally inclined to do — there are theoretical and practical objections to apportioning fixed-charge cost completely on this basis. In the first place, is it economically sound or just to charge for the use of the plant at the time of the peak load all the fixed-charge cost and let the use of it at other times go entirely free of such cost ? Of course some of the fixed cost can be spread out by putting it into the kilowatt-hour charge, and this element in the rate should be given the burden (not the benefit) of the doubt. But to do this is to abandon a fundamental point in kilowatt cost analysis, and to dis- tribute some of the fixed cost differentially merely according to con- siderations of policy. And if here, why not elsewhere? For ex- ample, why not make the off-peak users pay some of the fixed cost and thus reduce below "cost" the miit charge for peak use of plant ? If the company sticks to the cruder conception of the individual consumer's demand as his maximum peak, however, something will be charged for the off-peak use of the plant, but in a rather hit-or- miss fashion. And under such a system the consumer's fixed cost per unit changes from year to year, owing to the development of I'lO Electrical Hates diversity to which he presumably contributes nothing, which grows up also witiiout any encouragement from the company in the form of rates adjusted to prumote diversilication and a better load factor. Should the company maintain a passive or nearly passive attitude in the matter of its load factor? If costs for plant imposed by the consumer are so definite and inevitable as they are often made tx) appear, of course the company can do nothing except be sure of its compensation. But if it can reduce tliese costs per unit of output by a proper adjustment of its rates, in the long run giving to the consumer most of the benefit of such reduction, why should it be fettered by a kind of cost analysis that at best takes account of the past rather than of the future? In other words, is not a differ- ential policy the only sound mode of applying load-factor consider- ations in rate-making? The company should strive to smooth out its peak by diversification of business and by load-factor rates plan- ned with reference to accomplishing this. The analogy with the railroad-rate situation should be helpful at this point. Dill'erential rates are there due to the policy of favoring certain classes of freight that will be shipped in large volume, and their j)urpose is the more fully to utilize the railroad plant, or the fixed capital. The electrical plant's problem in rela- tion to obt-aiuing a better load is somewhat dilfercnt in its nature, but the fundamental economics of the two cases are tlie same. And the result to be expected is the same in both cases, that is, dilTer- entiation. The economist will naturally not look with favor upon a short-sighted attempt to make the thing more palatable by calling it something else. What is needed, rather, is the training of dider- entiation into conformity with economic principles. Difl"erentiation is not necessarily or naturally associated with arbitrariness, though it can scarcely be reduced to rules of tlininl). It is hardly necessary to say that electrical company managers iis\ially pay more attention in practice to " value of service " than to strict load-factor con- siderations. The ordinary conception of (he basis of the demand charge, ac- cording to which it is sinij)ly a f|U('s(ion of the consumer's individual ma.ximum, has the appeararn i- of mnkin^r it possible to follow the tliread of causation to its source in the case of the fixed-charge element in cost as easily as for the most obviously separable element. Load-Factor Rates 151 The falsity of this assumption has been dealt with. But even if it were true — or if we could deal with the consumer's demand in an equally absolute way by identifying it with his kilowatt requirement at the time of the station peak — the differential character of the demand charge would not tliereby be exorcised. In the matter of power-plant economy, it makes a great deal of difference whether a central station must provide for a large demand or a small demand. The difference between a 2000-kilowatt generator and a 20,000- kilowatt generator, both of which sizes are well within the extreme limits of the range of capacity of generators actually in use in cen- tral stations, is an important one for unit costs of construction and operation. According to the rule cited above " the specified increase in size should involve an increase of at least 65 per cent in physical efficiency. This of itself would be an incentive for the electrical company to expand its business by means of differential rates that affect the charge per kilowatt as well as that per kilowatt hour. Such elasticity in rate-making is more than the germ of diiTeren- tiation and it accords ill with the notion that the determination of the demand charge is a matter of arithmetic instead of a question of business policy. It should be understood and must be admitted that a differential policy may choose to ignore in large degree, instead of emphasizing, variations in the load-factor element in cost. In other words, the supply company may prefer to deal simply with the average, or with the several average conditions of a few large classes. The lumping together of the long- and short-hauled passengers of street railways affords a familiar illustration of this sort of thing." But in this case the density-factor rather than the load-factor justifies the policy, hence the analogy with electricity supply is not direct. Moreover, and more important, the electrical company is in posi- tion to deal actively with the load-factor situation, and use its rate schedule to favor off-peak consumption, instead of merely accepting such advantages of diversity as accidental developments confer upon it. " Chapter I, p. 28. »*J. W. Lieb of the New York Edison Co. cites this analogy (1916 A. I. E. E. Pro- ceedings, p. 76). The differential character of street-railway rates is affirmed by the present writer in an article in the Quarterly Journal of Economics for August, 1911 (vol. XXV, p. 623). ITiS Electrical Rates The problem of meeting the maximum demand is not unmixed with the cognate problem of proper reserves of capacity for dealing with emergency demands and growth. It is obvious that insurance against the unexpected is a matter of providing a small per cent above the necessary maximum capacity — for this purpose including in the reckoning some overload capacity as available. The capacity reserve for growth is rather to be determined by the balancing of investment and operating economy in large units against the fixed cost of carrying an added investment for several years without di- rect return. The cost-accounting treatment of the first or insur- ance aspect of the problem of reserve capacity is not difficult. The capacity necessary to meet maximum demand, including the neces- sary capacity reserve (except so far as unexpected developments can be taken care of through overloading), is to be counted as cost. The excess capacity providing for growth, on the other hand, is not properly chargeable to current costs, that is, it pertains to some fu- ture year. As unused provision for growth it ought not to influ- ence rates directly. In electricity supply there is much less need of anticipating future requirements by present physical provision than in the case of water supply. The fact that load-factor theories deal with the fixed-charge ele- ment in cost in itself constitutes a presumption that a load-factor adjustment is difi'erential in character, since it is almost obvious that the commercial tendency with regard to such costs is univer- sally differential. An examination of the load-factor theory and of its application to actual rates serves to show that we have here, not a piece of ordinary cost accounting, but a peculiarly interesting and important species of differentiation. CHAPTER VI WHOLESALE RATES AND aUANTITY DISCOUNTS Wholesale rates are presumably differential. Quantity discounts. The difference between wholesale and retail prices not merely a question of quantity. Continuous character of electricity supply — no true whole-sale. " Quantity discounts " not a matter of form. Need of segregating initial or consumer cost, which is inappreciable above 200 kilowatt hours a month. Collection of such cost from adjacent size classes. Actual range of pure quantity discounts may be two-thirds or more. Such discounts properly apply to the kilowatt-hour element but may affect others. Power for transportation companies a special case. Large pure quantitj' discounts specious rather than sound. Intensiveness of use and density of consumption not the same as large quantity. Load-factor and density-factor considerations should be dealt with explicitly. Large power rates have been less regulated than others. The competition of isolated plarits. Bargaining power the foundation of undue concessions. Comparative advantages of the private plant. Aggre- gate isolated plant capacity probably as great as that of central stations. " Merchandizing " contracts for operators of tenement and loft buildings. Concession to the landlord as regards the wholesale minimum. Possiblj' other means of dissimulating concessions to those with special bargaining power. Bearing of the presence of isolated plants upon density-factor econ- omy and upon the cost of transmission and distribution. A case where distribution is not a general or joint cost. Concentration as a means of wartime economy. The opportunity for diversification and intensification of use among small consumers. Tendency to lump all small consumers under a general rate. The social importance of morselized power supply. Electricitj' in the house- hold. Gas as a competitor. Motor uses more economical than heat uses of electricity. Even the urban lighting field not fully occupied. Impor- tance of density and of rates adapted to promote it. Domestic uses entitled to more recognition. How volume of consumption may best be recognized. Wholesale rates less a matter of course and more a matter of differentiation than is com- monly supposed. True cost analysis leaves a zone of differentiation. Th(! requirement of generalizability. Electricity supply not in itself of such a nature as to justify large qauntity discounts. IDensity, on the other hand, highly important. Mere quantity discounts not in accord with this idea. Isolated plants inimical to density. But the rate cannot be fixed merely with reference to "getting" the isolated plant. Possibility of co-operation with the latter. Desirability of making the density factor explicit in rates, perhaps as a discount for quantity consumed per foot of block front. Density not a matter of size. Distance from the station a different mat- ter. Density factor discounts should be combined with load-factor dis- counts. High tension rates another matter. Public interest in putting wholesale electrical rates upon a sound basis. In considering the subject of low rates for large quantities, or low rates to large consumers as such, it is again necessary to look 153 154 Electrical Rates for differentiation. By differentiation, as lias already been indi- cated, is meant the distribution of the burden of fixed charges according to some other rule than that of arithmetical uniformity. Wholesale rat^s and quantity discounts arc not ordinarily thought of as differential in their nature. But it is a well known fact that differentiation carried to the extent of abuse and injustice has usually come about through immoderate concessions to large con- sumers due to their special bargaining power. Eailroad rebates constitute an important example of this sort of thing. In the case of public-service corporations generally, wholesale rates may be presumed to be as much differential in spirit and purpose a.s are class rates. Hence the importance of inquiring into the basis and the legitimate degree of this sort of differentiation in connection with electricity supply. Quantity Discounts The validity of a difference between wholesale and retail {)rices is universally recognized. Indeed the ordinary mercantile concep- tion — which influences and in fact dominates economic thought much beyond the circle of the trading classes — is commonly allowed too much scope. The situation may be quite different from that supposed by such notions, if what is sold is not wares but the ser- vices of fixed capital, and if profits are no longer prinei{)ally depen- dent upon the raj)id turnover of circulating capital. Where to draw the line between wholesale and retail is often a difficult question. Sometimes the lower price does not depend directly on quantity but comes l)y way of concessions " to the trade." Sometimes there is a fairly well marked objective distinction, as in tlie case of railroad freight shipi)ed in car-load lots.' High- tension or primary power is similarly different from the low-tension electric energy in the supply of which the ordinary distinction between wholesale and retail rates applies. ' In a rwcnt opinion of the Interstate Commprce ConimlsBlon, in the rrivatowirc case, dated Aufru.ot 3, 1918, itJt poRition on the subject of straiffht wholesale rates, which is supported by prece quantity of energy taken increases. Quantity discounts can be efTectcd by the block as well as by the step method, and indeed, since the former is in accord with the better and the prevailing practice, the block method will ordinarily be assumed to be the one to be considered. Moreover, quantity discounts that are more or less palliated or con- cealed, perhaps as prompt-payment discounts — on their face a curi- ous reflection on the credit of large consumers — or as concessions granted in consideration of long-term contracts, or in return for large guaranteed minimum payments, or by way of graduation of the demand charge, are still economically significant merely as quantity discounts. There remain to be considered two questions, one as to the proper range of variation between the small consumer and the largest one — involved in the distinction between differentiation and discrimination — and another as to whether the mode of making concessions purely on the basis of quantity consumed can properly be carried as far in electricity supj^ly as in other industries. But, before considering the range of the quantity discount proper, it is well to segregate the influence upon tlic iiiilial rate of the initial costs of serving a particular consumer. This element in cost, that is, "consumer cost," so-called, is not peculiar to elec- tricity supply, but is involved to a greater or less extent in any attempt to compare wholesale and retail prices. Consumer cost naturally varies considerably as conditions vary from city to city. We shall here use 50 cents per meter per month as merely a conveni- ent round number that is approximately what the consumer charge for the small consumer ought to bo." This may in some cases be 'Cf. page 00 ff., above. The reference Is to conditions not .-wJjuKted to tlic rffe'^U nf the war. Wholesale Rates and Quantity Discounts 157 rather low, but there are good reasons why the separate consumer charge sliould be as small or as closely calculated as is practicable. For the purpose of determining the range of the quantity dis- count proper, after allowing for consumer cost, it is convenient to reduce the latter to terms of kilowatt hours. Upon the basis of 50 cents a month it is easy to compute its importance in relation to quantity discounts. Reduced to cents per kilowatt hour for va- rious size classes of consumers the charge varies as follows: For the consumer taking 10 kilowatt hours per month 5c per kw. hr. " " '• " 50 " '• " " Ic " 250 " 0.2c " " " " •• " " 1000 " " " " 0.05c and so on for intermediate and further points, tlie computation being a matter of the simplest arthmetic. At 200 kilowatt hours this element in cost accounts for a quarter of a cent per kw. hr. At 1000 kilowatt hours it is of very little importance as an element in the rate. It is evident that if we compare the rate at 200 kilo- watt hours with that for the largest quantities provided for in the rate schedule, the range of variation between these two points should be affected by consumer cost only negligibly. The conclu- sions to be drawn from such a computation as this would remain substantially the same if the consumer charge were multiplied by 2. It is easy to test the importance of this or any other fixed amount in relation to the variation of the kilowatt-hour rate. A qualification is necessary, however, with reference to the possi- bility of the rate somewhat beyond the range of the smallest con- sumers being kept high enough to compensate the electrical com- pany for not collecting full consumer cost from the very smallest class. This practice, where pursued with moderation, is defensible on the ground that, in price-making — though not in dealing with most other demands for justice — it is often sufficient that justice be done in the average rather than in each individual instance, though the averaging should not he too rough and ready but should, on the contrary, treat like cases alike so far as practicable. But such a method of compensating for initial costs properly applied should scarcely affect the rate above 100 kilowatt hours a month. Where the demand charge does not count directly, the range of the quantity discount can be easily determined. It happens that the rates of one of the most important electrical companies in the 168 Electrical Rates country, the New York Edisou, are, since I'Jll,* entirely on a quantity basis so far as relates to low-tension consumers, the excep- tional consumers being few in number and of very special char- acter, the use of high-tension alternating current involving the in- stallation and operation of expensive apparatus for what is in elfect the further manufacture of the energy on the consumer's premises. For such high-tension consumers the company has Ilopkinson rates. The wholesale rate of the company referred to is a strictly " block " rate, hence only the mathematical limit of the average rate, that is, the rate for the last block, can be stated definitely without reference to specific volume of consumption. The lowest rate is 2 cents and is for the block " over 1,100,000 kilowatt hours a year." The charge in excess of 2 cents for the preceding blocks adds .875 cents per kilowatt hour to the 2 cents at the 1,100,000 kilowatt-hour point, making the average rale there 2.8T5 cents. For a consumer taking 2,200,000 kilowatt hours a year the average rate would therefore be 2.4375 cents. Previous to 'May 1, 1915, the lowest low-tension rate to the largest consumers (from 833,333 kilowatt hours a year up) was 3 cents straight, the straight rate having been obtained by the interjection of a free block. Under the old schedule the range of variation of the rate was equal to the difference between 9 J (the maximum less luilf a cent for lamps) and 3, or 6^ cents. In commercial terms, this amounts to a 68 per cent discount. Under the present schedule it is difficult to say what is the practically significant extreme range. At 833,333 kilowatt hours the present average rate is 2.995 cents. The maximum was reduced to 8 cents on May 1, 1915, and further to 7^ on Jan. 1, 1917, then to 7 on July 1, 1917. Adjustments in the early blocks confine the effect of the 1917 reductions to the initial portion of the average- rate curve. The ratio of the maximum rate to the average rate at 833,333 kilowatt hours per year is evidently less than the ratio of 9^ to 3. The figure that is in the same ratio to 8 that 3 is to 9^ is 2.526. Only consumers of nearly 2,000,000 kilowatt hours a year get such an average rate. The initial block at 8, 7^ or 7 cents ex- * Jtwt prior to 1911 the rat« to the so-called "Intermediate wholesale claRP " involved the " hours' use " bn.si!i, but the wholesale rate itielf was already purely a matter of quantity of encrgj' taken. In its report to stockholders in .January, 1912, the Consolidated Gaa Company, which controls the New York Edison, characterizes the rate schedule adopted by the latter in 1911 as "designed .... to insure to each customer a rate commensurate with the volume of electric energy he consumed." Wholesale Rates and Quantity Discounts 159 tends to 900 kilowatt hours a month, and the previous initial block extended to 250. Consumer cost is doubtless more than taken care of before either of these points is reached. Thus, it is not necessary to make any appreciable allowance for this element. The pure quan- tity discount is still about two-thirds of the price to small consumers. This is probably less than the quantity discounts contained in the rates of other companies, but it is seldom possible definitely to deter- mine their range. The New York Edison has not gone farthest in this direction, but it appears, in its schedule, to pursue the ends in question with a directness and simplicity of which the example is not without influence upon the industry generally. The character of the New York Edison rates — thougli they can- not be considered representative or prevailing practices — is of gen- eral interest because of the importance of the example. They also lend themselves neatly to graphic representation. Figure f is pre- sented to show a thorough-going system of quantity discounts. The diagram is comprehensive for all low-tension rates (as of 1915) of the New York Edison and United Electric companies, which supply practically all Manhattan and The Bronx. The classification is of the simplest. All graduation is on a purely quantity basis and by means of blocks, not steps. But in order that the quantity discounts be applicable, the energy must be supplied to the same owner or leaseholder, and to the same building or to buildings not over 100 feet apart. A system of chain stores, for example, cannot, as such, get the benefit of the discounts." Figure 5 shows both the rate blocks and the variation of average rates. An explanation of the necessary inexactness of the means adopted for reducing the whole- sale rate, which is on an annual basis, to the monthly basis of the retail rates, is given on page 134, above. The construction of Figure 5 need not be further explained." It will be noted that, within the range of the curves, which reach the very largest class of consumers, the average rate drop? for the wholesale class to 33 " a rider of the Commonwealth Edison Company of Chicago, recently abolished by the Illinois Commission, granted discounts where more than one premise was covered by one contract, of 5 per cent for two and one per cent more for each addition, but with a limit of 20 per cent and of four cents per kilowatt hour. 13 Rate Research 38, 40. P. U. R. 1918B 732. * A detailed description and interpretation, together with the diagram, is contained in the Annual Report of the New York First District Public Service Commission for 1915, vol. Ill, pages 119flf. The rates have been slightiy modified, since the date of the diagram, not, however, in a way to involve any char.ge in principle. Wholesale Rates and Quantity Discounts 161 per cent of that obtained by consumers who take 900 kilowatt hours and less per month, and for the storage-battery and refrigeration class to 28 per cent. Comparisons to determine the range of quantity discounts in the case of the Wright type of rates are not so easy to make. The rate for the small consumer in force in Chicago ^ is 9 cents a kilowatt hour (disregarding a prompt-payment discount of 1 cent) up to 30 hours' use per month of his maximum. Lamp service is included, hence tlie rate without lamps may be treated as 8^ cents. Large light and power consumers (low tension, A. C.) pay a demand charge of $2.00 per kilowatt per month for the first 200 kilowatts plus $1.50 for each additional kilowatt* and an energy charge graduated between 3 cents for the first 5000 kilowatt hours a month and 0.65 cents per kilowatt hour for all over 100,000 kilowatt hours a month, this energy charge being subject to a 10 per cent prompt payment discount. On this basis the kilowatt-hour charge for a consumer taking 1,200,000 kilowatt hours a year is about' 1.055 cents, less 10 per cent, and for one taking twice as much 0.8525 cents, less 10 per cent, and so on. The demand charge that goes with this can only be estimated. With a 20 per cent load factor, the maxinmm for 100,000 kilowatt hours a month would be approxi- mately 685 kilowatts, costing ($400 plus $628) $1028 monthly, or 1.028 cents per kilowatt hour. The rate thus appears to be 2 cents or less per kilowatt hour for some large consumers. The range is greater than in the New York Edison schedule, but the discount in this case is not purely a matter of quantity, though the kilowatt-hour graduation shows it is mainly that. Other features of the Chicago schedule show that tenderness to quantity is by no means absent. The above are merely illustrative cases and not extreme for elec- trical rates. They probably are considerably greater than ordi- ' 1917 N. E. L. A. Rate Book ; rates involved in this calculation the same in the 1920 Rate Book. * The lower second block is a concession granted only where the demand charge is on a yearly basis. * The " about " is necessary because, since the energj' charge is based on monthly consumption, the more irregular the distribution of tha 1.200,000 kilowatt hours between the months, the lower the average rate, because a greater proportion will be charged r.t 0.65 cents and a less at 0.9 cents, the latter being the rate from 30,000 to 100,000 kilowatt hours a month. Cf. p. 134, above. 162 Electrical Rates nary wholesale discounts." ronijjarative statistical analysis of rate si'hodulos ,i:cn(M-ally with roforeiice to the point under discussion should be worthwhile, but should be supported by considerable knowledge of the actual application of rat-es and not merely of the formal schedules. In the above discussion the writer has attempted to isolate the quantity discount and it has been assumed for the sake of simplicity that this discount will apply to the kilowatt-hour element in the rate and that the graduation of other rate elements will be based upon other considerations. These assumptions are not entirely in accord with the facts. We know merely that the graduation of the kilowatt-hour element is properly a matter of quantity discounts, though there may also be other considerations induencing the graduation. As regards other rate elements the situation is reversed. The dominant idea may sometimes be that of favoring the large consumer, but the extent of such concessions cannot easily be measured. The demand element in the ITopkinson rate is usually graduated, either by blocks or, less conuiionly, by steps. It has also been noted that estimation of demand, wliether under a Wright or a Hopkinson rate, may l)c similarly affected. So far as these practices are due to the desire to grant quantitv discounts, they are of course more objectionable, because dissimula- tive, than discounts relating directly to the kilowatt-hour charge. Even where a definite intention to lower the rate on the basis of mere quantity consumed cannot be alleged, the Wright type of rate lends itself so readily to the disguise of quantity discounts that there is always room for suspicion of such influence. Indeed, not much could be found to object to in such practices if the rate were worked out and put forward as based upon density-factor consid- erations. The marked discounting of the demand element for size in a Hopkinson rate where the kilowatt-hour element is also discounted for quantity is not equally defensible. The demand fixed by con- tract, and even the nu'asurod peak, is fhiofly a matter of extent of '• In the recent tllKpoml of War Dopartmetit cnnneil nieatH by the Kovemmont. as per rates advertized in Fehrtiarj-, 1021, diw-ountu wem allowed up to STi per cent (for purchases of over $1,000,000) under the rate for a minimum $2r.O order. These rates have reference to getting rid of a surplus arrumulated on other than economic jfrounds and should be greater than ordinarj- wholesale discounts. The minimum order accepted is not a retail lot Wholesale Rates and Quantity Discounts 163 premises, and therefore not directly connected with intensiveness of use. Any needed concession to long hours' use is either suffi- ciently provided for by the two-charge form of the rate or will naturally appear in the kilowatt-hour element. The business of supplying with power street railways and elec- trified terminals and other portions of steam railroads constitutes a field of large-scale electricity supply in which the central stations are displacing independent plants more and more. Doubtless the tendency is economical. It is noteworthy that quantity discounts have little to do with the matter — nor need they, since the quantity to be supplied can be so definitely determined beforehand. As regards the load-factor, also, the demand is nearly the same from day to day, except for abnormal weather conditions in winter, so that the peak can be pretty definitely predicted or else controlled. The protection of the central-station's peak is usually specially pro- vided for. Such contracts, indeed, do not involve a rate, in the sense of a price generally available to consumers on conforming to specified requirements, hence, like street-lighting contracts, are only of collateral interest for the present work. There is a certain appearance of reasonableness in large quantity discounts. An argument may be based on load-factor considerations. A more effective argument makes implied or explicit use of the density factor, though here also the plea of the opponent of quan- tity discounts may be chiefly one of confession and avoidance. The argument from the general appearance of reasonableness (the first of the two questions to be considered) is merely specious. The merits of the question raised must be ascertained. In fact the supplying of a large quantity of electricity, other things equal, costs no more per unit than the supplying of a small quantity, once the influence of consumer cost becomes inappreciable. There is no dif- ference as regards methods of handling (which are due chiefly to vehicle and package units) as between 10,000 kilowatt hours sup- plied to one consumer and the same amount supplied to 1000, if consumer costs are otherwise provided for and if two other things are equal. One of the " other " tilings to be considered is the relation of the time when the energy is taken to the company's load factor — a question already sho^\Ti to be properly independent of the detemiin- 164 Electrical Rates ation of the range of quantity discounts. Classification by mere quantity taken is obviously too crude to fit load-factor conditions. For some conspicuous groups it does not fit at all, notably in the case of lighting for department stores and oflSce buildings, tlie use being for a short period and on the peak. Furthermore, if due recognition of the load factor is really the purpose, it is entirely practicable to register the variations of the load of large consumers and give to each of tliem the full l)encfit of his load factor and diversity as such. It should be added, perhaps, that because of the diversity of the different elements constituting the large consumer's kilowatt-hour requirement, the computation and comparison of load factors would not of it-self fully justify correspondingly low rates to him. The diversity in question would favor the company as much if each ele- ment represented a different consumer. Such large consumers usu- ally combine both power and light. These two, though often metered separately, are ordinarily billed together ; yet the company is no better off because of the mere fact tliat they are billed together. Their simple combination will result in a higher load factor than holds for either separately. The situation is similar as regards the load factor of a landlord who combines his tenants' consumption with his own. Diversity is not increased by combined billing. The fact that the diversity influences intermediate load factors (feeder, line and sub-station), as well as that of the electrical system as a whole, has no particular bearing on rates. At least there is no occasion to give to the large consumer more adviuitage from the diversity within his own consumption Ihaii an explicit load-factor rate would give. Tlie remaining (the second) question ri'lates to tlic area within which or over which the supply is spread, that is, to the density factor. While it, like the load factor, has no necessary connection witli mere quantity consumed, density is involved with quantity. But it is not to be assumed that there is a necessary connection be- tween high density and high load factor. The situation in question is well illustrated by the case of large office buildings. The value of the site involves an intensive use of the area and a lofty structure. Electric elevators and other electrically operated equipment, the lighting of corridors, and the free use of Wholesale Rates and Quantity Dlscounts 165 energy for light and other purposes in connection with the utiliza- tion of the time of the well-paid office staff of tenants, all together involve a highly intensive use of energy per square foot of ground area or per foot of block front — a high density factor. One may also naturally infer that there is a high degree of use of connected load or maximum demand, in other words a high load factor — a strictly intensive use of the demand. In fact, however, the winter lighting of offices in a large city comes on before 5 P. M. and begins to drop off at that hour. Little or no regular office lighting is required in summer. The demand is therefore almost exclusively on the peak. Lighting for commercial purposes in general shows similar characteristics, but office lighting is quite the worst of the class. Even with other kinds of service to help the situation, the load factor of office buildings is bad and the diversity ratio com- paratively worse. In this case, certainly density and intensiveness of use do not go together. Department stores do better, but the quality of their demand suffers in the same way. In fact, there is a degree of inherent opposition between density and diversity, as referring to a comparatively restricted area, owing to the localiza- tion of employments. In the case of mercantile establishments, moreover, the competitive situation compels general conformity to agreed-upon or established rules and practices in regard to closing hours and other controlling conditions. The earlier closing of the stores in the higher-grade shopping districts accentuates the unde- sirableness of such lighting demand. As to diversity, as measured by non-coincidence of peaks, there is practically none in the com- mercial lighting class of uses, though once the load is on, it may be continued to an earlier or later hour in the evening. As regards both load factor and density factor the sound policy is to grant concessions specifically on these grounds and in proportion to favorableness in these respects, if this is what the electrical com- pany wants to do, instead of obfuscating the issue by basing the rate merely on quantity taken. Existing rate schedules and practices abundantly show that load-factor considerations are easily dealt with as such. The influence of the density factor on cost has not found explicit recognition in rate schedules, but is in its nature even more easy to deal with satisfactorily. 166 Electrical Rates Large power rates of electrical companies have boon subject to less interference from regulatory commissions than other parts of the rate schedule, partly (it may be surmised) because it has been felt that the public generally is not directly afTected, partly because competition from other sources of power is effective, especially since the consumers are themselves substantial business men, and partly because the determination of rates for such service is intrinsically a rather complex problem. It has been argued that the public is not interested in preventing the central station from taking from the manufacturer a share of his extra profits. One commission has adopted the view that a burden placed upon commercial lighting and industrial power is so subdivided and passed on to the public generally as not to be burdensome." It may be noted, parentheti- cally, that the economist will not readily accept the notion that in- direct taxes are best. On the other hand, the general public is di- rectly concerned that power rates be not so low as to shift the burden of carrying the utility to other rate classes. Doubtless the margin on power rates has been closer than elsewhere, hence there has been a well-nigh universal increase in such rates as a result of the War." Recent experience has also called attention to the fact that the quality of large industries as customers is impaired by their being affected by shut-downs and periods of depression." There are still to be considered the merely commercial or com- petitive, as distinguished from the technical or the strictly economic, grounds for low rates to large consumers, and the incidental ten- dency towards unjust discrimination by way of quantity discounts. The Competition of Isolated Plants Special bargaining ))ow(T on the part of tiie shipj)cr or consu- mer is the foundation of undue concessions to him. The tendency may be an incident solely of his size or of the volume of business at stake, but this factor is usually at least reen forced by competi- tive possibilities of one sort or another. In the case of electricity '' Georgia Railroad CoinniiKsiun, fJeorgia Railway k Power case, Sept. 22, 1920. 18 Rate Reearch 43. "Committee on Public Utility Rates, Natioual Association of Railway k Public Utility Commissions, 1019 Convention Proceedings, pages 05-00. ** Massachusetts Department of Public Utilities, Athol Gas & Electric case. P. U. R. 1920C 1033, 1039. Wholesale Rates and Quantity Dlscounts 167 supply the important competitive possibility is the isolated or pri- vate electric plant. Less directly, competition with steam power plants is of some importance. The central-station representatives of course claim that the isolated plant is uneconomical. The question as to comparative economy is not easily decided. The central station has the advanta,2es of large-scale production — and the increase of efficiency with size in the case of an electrical station is very marked." A private plant, however, is not neces- sarily a very small plant.'" But these advantages are not so decisive as the general student of economics may be inclined to assume. The private plant saves the fixed and operating cost of transmitting and distributing electricity, and this is as important an element in central-station cost as is the cost of generation. The private plant will usually have considerable expense for cartage of coal from which the central station may be exempt. The load-factor or degree of utilization of a private plant is not ordinarily good, while that of the central station has all the advantages arising from the broadest diversity of demand. But perhaps the most important matter is the facility of using by-product low-pressure or exhaust steam from the private plant for heating, while the central-station can seldom make much of this possibility, because condensation losses are so great on steam sent any considerable distance." Large and efficient engines are also condensing engines, without by-product exhaust steam. It may be a better description of the situation to say that the electricity needed for lighting a building in winter may be in large part a by-product of the steam needed for heating the building *■* The case against the isolated plant in this respect is well stated by Paul M. Lincoln in a paper on the Relation of plant size to power cost, in the 1913 proceedings of the A. I. E. E., pages 1937-1948. *' The plant of the Equitable Building in New York City is of 2600 kilowatts capacity ; that of the Woohvorth Building of 3300 kilowatts. The great majoritj' of central stations have a smaller oapaoitv. (See pas:e 28, above.) Plants of manufaoturina: concerns are commonly larger. That of tha Ford Motor Co., said to be the largest direct current plant in the world (Electrical World of August 12, 1916, page 312), is of 65,000 kilowatts. " Alliances of electrical with steam-heating companies, or with so-called " service " companies that manage steam plants, are a natural result. The Missouri Public Service Commission, re Union Electric Light & Power Co., in relation to steam-heating rates appar- ently designed to obtain an electrical contract, refers to the " suspicion of separate bargain- ing or, in other words, of potential discrimination, if not discrimination in fact." P. U. R. 1918E 490, 526. Similarly, California Railroad Commission, re Pacific G. & E. Co., P. U. R. 1920E 597. 1G8 Electrical Bates supplied by a bloik ])lant." Tlie time of the need of tlie steam for heatinf;, however, is not so nearly coincident with the time of the need of electricity for lighting and for elevators, etc., that the full advantage of the relation between the two can always be obtained. Eefrigeration has, however, in some cases been found an available alternative to heating. The importance of isolated-phmt competition is nicii^urcd from another viewpoint by the extent to which such plants already occupy an important place in supplying electricity. Entirely satisfactory data upon this point are not available, but it appears that, recently if not at present (in 1921), even after leaving out railway plants, more electricity was generated by private plants than by central sta- tions. In manufacturing establishments in 1909, of 4,817,140 horse- power in electric motors, 1,749,031 horsepower was run by purchased electricity and 3,0G8,109 horsepower by energy generated by the establishments." Central stations, hydraulic and steam combined, appear to have had a greater capacity. But a deduction from the central-station total for the prime-mover capacity required for manufacturing motors run by purchased power should be made (since doubtless some part of the energy purchased did not come from central stations) ; and a further deduction for municipal plants makes the difference in favor of the central stations small."* Besides manufacturing enterprises, many large ofTice and mercantile build- ings have private plants. Data more to the point, though naiTower in their scope, and which, though not official, have been compiled by or for one who is •'After an elaborate test of the Hall of Records power plant in New York City, making due allowance for the use of by-product steam, " the independent enginccrinR counsel (ProfesHors Lucke and Carpenter) have arrived at the conclusion that, if the Rdison company were to sell current at a price which would be to the advantiige of the city, it would not charge more than 1.40 cents per kilowatt hour, or 1.66 cents per kilowatt hour, makintf allowance for taxes." Letter of trani?niittal to printed document: Hall of Records Power Plant Report, City of New York, 1910. The test was conducted for the full year 1913. The lowest available rate of the New York Kdison Company was considerably over 2 cenUi. ** 13th U. S. Census Abstract, p. 471. The 1914 Census does not show electric horse- power s'/parately. "The central station figure for 1907 is 4,098,188 horsepower and for 1912 7,528,648. Interpolation for 1909 gives .1,490,372; less some part of 1,749,031; less 416, .542 (inter- polated between 321.3.')1 and .'..09,328) for municipal stations leaves perhaps 4,.')00,000. Owing to demand factor and diversity factor, even after allowing for distribution and other loss, the central station prime-mover capacity attributable to the manufacturing motors would doubtless be less than their capacity. Wholesale Rates and Quantity Discounts 169 in position to know,'" show the situation in the city of Chicago in January, 1912, as follows, the figures being maximum loads: Light and power stations 100,540 kw. Street railways 186,920 kw. Isolated plants 194,300 kw. Steam railroads 146,750 kw. Total 628,510 kw. The last item does not refer to existing electrical supply, as the others do. j\rr. InsuU says that the combined load factor for the isolated plants may be assumed to be equal to that of the Common- woallh Edison Company, which is stated to be 35.5 per cent. The kilowatt hours generated by private plants may accordingly be esti- mated at almost twice the light and power central-station output in a city where the leading electric-supply company has been partic- ularly enterprising in going after such business." An outgrowth of this competitive situation, of very great interest for the consideration of electrical rates, is the merchandizing con- tract lately prevalent in New York City for the service of office buildings and apartment houses. The situation involved is of general interest, even if not found elsewhere. Under such a contract the consumption of tenants and landlords was combined and billed to the landlord or his representative at whatever rate the quantity discounts on the total consumption brought about. This often re- sulted in the company's getting from the tenant little over half what it othei-wise would." The tenant might or might not get some small concession from the landlord. The company in either case performed substantially the same service at the same cost. But under the revision of the rate schedule effective May 1, 1915, by which the company no longer sub-meters Avithout charge, the situ- ation was considerably changed. The maximum rate was also cut ^"Samuel Insull (President of the Commonwealth Edison Company of Chicago), in Transactions of the American Institute of Electrical Engineers, 1912, vol. XXXI, part 1, pp. 241-242. '' Insull gives similar figures of later date (Journal of the American Society of Mechani- cal Engineers, Nov., 1916, p. 853) as follows: Light and power business of the Common- wealth Edison Co. (doubtless including street railways), appro.ximately 338,000 kilowatts, isolated plants. 264,500 ; steam railroads, 125,700 ; total in city, 728,200. ^ The transfer of business from one rate cla-ss to another class with a lower rate is proposed in an able unsigned article in Rate Research, February 12, 1913, vol. 2, 1912-13, p. 303, (opinion in question on p. 320), as a sufficient check upon differentiation through lowering rates. The point of view is evidently too exclusively that of the central-station manager. But the practice of the Xew York Edison disregards this criterion. no Electrical Rates to 8| cents (and has since been further reduced), other (average) rates being reduced a larger or smaller fraction of one cent. The profit obtainable by the landlord through acting as middleman is thus much reduced but not eliminated. Previously the company had practically ever}' expense it would have if it dealt with the ten- ants separately — except that the credit of the landlord might be a little better and tlie cost of collection reduced — since it supplied and read the individual meters and reported the readings to the landlord, renewed lamps, and attended to all matters relating to quality of service, etc. Because of the importance of consumer cost, since these tenant consumers are small, they are supposed to be unprofitable to the company, the rate being on a purely kilowatt-hour basis. But the quantity discount was applied nevertheless.*' A contract rider practically limited the application of the method to a single block. But there are, or were, cases of such merchandizing consumers hav- ing several hundred meters. Under the wliolesale rate, however, there was a rider in accordance with which it was not even necessary for the landlord with com- paratively little consumption of his own to contract on belialf of his tenants in order to get the benefit of the wholesale instead of tlie maximum rate, since the company counted tenants' consumption towards the minimum amount required to bring tlie landlord under the wholesale rate. It is obvious that such provisions had reference to the possibility of the landlord's combining his tenants' consump- tion with his own if he cared to install his own private plant. The competitive situation, not cost, detennined the rate policy of the company at this point. The rate schedules of other companies than those of the New York fMison and the associated United Electric Company doubt- les.s accomplish the same thing, but not so directly. It should be added, however, that the corridor lighting and ele- vator service of the landlord is in effect an extension of the service of public ways and may on that ground be considered entitled to favorable difl'erential treatment, so far as the costs imposed upon the company allow,** " " When the wholcMiIe Is inprely the bookkeepiriff afn^red^ate of numcroun retail de- liveries the principle .... applies to a much le-^ser fleprree." Report of the Rite Research Committf-e, 191.5, N. E. L. A. Convention proceedingR, Commercial vol., p. 339. •* Washingrton, D. 0., and Seattle, Wa«h., offer special rates for public lighting in apart- ment bouses. Wholesale IUtes and Quantity Discounts 171 Where a landlord, while performing no substantial service in this connection for the tenant, receives a considerable share of what the latter pays for electricity — supposing of course that this service is metered and billed separately for the tenant— it would seem that the situation constitutes a clear case and a most reprehensible form of rebating, morally if not legally. The better commercial credit of the landlord cannot, in view of the other means available to the electrical company to insure collection and of the inferior facilities of landlords for this purpose, be considered compensatory. But the abolition of gratuitous submetering doubtless changes the legal situation.*" Whether there are special inducements of which rate schedules give no evidence by which potential consumers inclined to operate isolated plants have sometimes been persuaded to take the central- station service, is an administrative question of some interest, but not a matter with which a general discussion of electrical rate theory and practice can deal to advantage. It may be noted in passing that such things might occur in connection with the wiring of con- sumers' premises, charged to " promotion of business." Companies sometimes supply auxiliary services and appliances and first instal- lations without regard to direct cost but ratlier with reference to extending consumption. Misclassification, also, which may be somewhat more diiScult for an electrical than for a railroad com- pany, is not impossible. Since the companies attach so much im- portance to getting the business of the large consumers, it would not be surprising if the latter were found to be specially favored in ways not appearing in published rate schedules. That this sort of thing is common commercial practice in other fields is a suffi- cient reason for watchfulness in the case of public-service corpora- tions. How prevalent and persistent it has been among the rail- roads is well-known. A corporation whose policies are open and 25 The use of private telephone exchanges in hotels and apartment houses is somewhat analogous to the combined metering of electricity consumed by tenants, but it seems not to have been done for the sake of direct profits and therefore not often to have occasioned disputes. There is one interesting case, where a hotel attempted to collect 10 cents a call for both room service and public corridor booths. The telephone company tried to adjust its rates to permit the practice. The Massachusetts Public Service Commission's decision pro- hibits hotels from purchasing telephone service in bulk and selling it at retail on the ground of lack of authority on their part to deal in such service, holding it to be immate- rial whether the hotel sought to obtain profits from the senice or not. 14 Rate Research 229-235. 12 ll*? Electrical Rates whose hejids are ]>ublic-8pirited, however, should not be subject to suspicion. Althougli large concessions for large quantities consiinied seem to be the natural means of meeting isolated-plant competition, this method may not be the soundest. The private plant ordinarily has a poor load factor. While the central station itself may not lie so decisively concerned with the individual load factor of the lari^e consumer (because of the advantage it obtains from diversity), unquestionably the variation of cost to the operator of a private plant is much alTccted by it. Under these circumstances it would seem to be unnecessary that the central-station company should give the same rate to all large consumers regardless of their load factors. In other words, even with reference merely to meeting most effec- tively the competition of the isolated plant, the wholesale rate should be a load-factor rate. Such a rate conforms best to the variation of isolated plant cost." Althougli isolated-plant competition is so likely to cause discrim- ination, the situation has also its positive aspect. Apart from general arguments in favor of large-scale production and supply — another name for the density factor — as reducing cost, density has very special importance in the case of electricity supply because of the large proportion of total cost due to transmission and distri- bution — a proportion usually as great as, and often much greater than, that employed in production proper. For this comparison transmission cables and sub-stations arc part of the distribution system. The ratio in question varies extremely, of course, especially according to the type of electric line construction, and is, for this and other rea^^ons, greatest in the largest cities. The burden of fixed costs on this account is reduced in proportion to the density of consumption within the field supplied by the central-station company, and such density is chiefly dependent on whether it gets as nmch as possible of the electrical business within its territory. A feature of the New York Edison Company's rate schedule that is from this point of view justifiable is the restriction of quantity discounts to the city-block basis. This policy results in some ap- proximation to the density-factor basis. " ^f^. Ives, in the Elwtrinal World, Apr. 17, \mr,, vol. eft, p. 989, Bays this point is " the strongest argument in favor of a load-factor rate." Wholesale Kaths and Qr^\xT^rY Dlscounts 173 In this connection it may well be noted that the great steam central-station company with the largest type of alternating-cur- rent turbo-generators, high-tension transmission lines, and a score of substations is technologically as different from a small-town plant as it is from the private plant of an ofTice building. The desirability of concentrating the generation of electricity as a matter of war economy in order to save coal was called to the attention of the public by conferences and press notices in March, 1918. It was proposed that large numbers of isolated plants ought to be shut down. The proposal applied for small central stations as well, and was accompanied by a suggestion of the joint utiliza- tion of some such small plants, instead of their being merely shut down." General economic conditions during the War, especially the difficulty of obtaining fuel, naturally worked strongly in the direction of substituting central-station for isolated-plant service. The annual report of the President of the Consolidated Gas Com- pany (Xew York City) "" records 72 private plants displaced by its subsidiary electrical companies during 1918. In fact the ten- dency of isolated plant OAvners to turn to central-station service as an escape from high coal costs and the difificulty of getting supplies has often occasioned embarrassment to the latter." While it is correct in general to treat carrv'ing charges on the distribution system as a joint cost, it should be noted that in the case of large consumers it is often possible and proper to separate this element in cost. Such a consumer may have a feeder direct from the sub-station for his individual use, which becomes thus in effect an expensive individual service connection. Such a feeder is more separable and more properly chargeable to the individual consumer than the regular service connection between the street main and the interior wiring of a multiple dwelling. It will very likely still be true that the average cost per kilowatt or per kilowatt hour for the distribution of energ}' to large consumers will be mark- " Mr. C. E. Steuart of the Fuel Administration at hearings before the New York Public Service Commission for the 1st District. Note in Electrical World for March 16, 1918, page 582. ^' February 15, 1919. (Reference in Electrical World, page 335.) ^ On which subject the Sandusky Gas & Electric Co. says: "We are compelled to buy coal at present prices and generate electricity to be sold at before-the-war prices to con- sumers who have taken advantage of our predicament to such an extent that anything like good service is impossible." Electrical World, June 19, 1920, p. 1448. 174 Electrical Rates edly lower tlian tlie corresponding average for small consumers. But tlie scjxirable cost that fixes the minimum limit to rate conces- sions arranged by the dilTercntial treatment of joint costs will, as regards this element in the total, be greater, not less, for the large consumer. In general the smaller the consumer, the greater the proportion of transmission and distribution cost that is joint, or rather the more nearly complete is the disappearance of the separa- ]ile element in such cost. The Opportunity for Diversification and Intensification of Use Among Small Consumers Electrical companies commonly sliow great interest in the largo consumer — to whom competitive options are open — and compara- tively little interest in the small consumer, not only the residence- lighting but also the small-power class. As a matter of fact, the " residence lighting " designation ought soon to become a misnomer. Indeed the so-called "general rate" is replacing the "retail light- ing rate " in current terminology. This is partly due to a tendency in the most developed centers to discontinue substantially the dis- tinctive class rate for power. Thus all small consumers, and some that are in fact not very small, are, or sliortly may be, in the same situation as regards electrical rates. One of the great economic — and social — reforms thai tlie electri- fication of power appliances generally may legitimaioly be expected to bring about is the removal of one great disadvantjige under which small manufacturers, including the so-called hand trades, have suf- ffrcd in competition witli large factories. It is impossible for the former to obtain their power economically directly from steam on so small a scale or in so manageable a form as they require. Cen- tral-station electricity admira])ly meets the need of morselized power supply. It can bring power-driven machinery down to the dimensions of one man's management and take from mere mass of capital its great advantage in this respect. Flexibility and ease of adjustment to the use in hand are advantages in which electricity ha.s no competitor. Shall the great public-service enterprises be allowed to hinder such a development because of the competitive clul) hf'ld over them by the large conccnis? The small power user often has to pay five times as much per kilowatt hour as the big Wholesale Rates and Quantity Discounts 175 manufacturer or the large operator in other lines. The electrical enterprises appear to feel too sure of this class of business to find out what its possibilities of expansion are. In residence applications, also — aside from the advantages of residence lighting over mere commercial lighting — '" there are great possibilities of which only the beginning of an exploitation has been made. Motor operated cleaners, washers, freezers, etc., have as yet hardly passed beyond the stage of curious interest. Electric refrig- eration is in principle just as well worth promoting in the home as in the factory. Cooking, especially such parts of it as may be done at the table— toasting, percolating coffee, etc.— ought to develop more rapidly than it does.°^ Heat uses as such are not economical — a point well illustrated by the fact that it requires the employment of two-thirds of a horse- power to heat the electric iron in common domestic use. Eegular cooking by electricity is likely to remain too expensive under any general kilowatt-hour rate that can at present be foreseen. But the combination of the fireless cooker plan with an electric heating ele- ment ought to be highly economical of direct cost as well as highly convenient. The common objection that the heaviest demand for cooking (for dinner) comes just at the peak hour scarcely applies for the insulated type of appliance. And most industrial power uses similarly come on the peak. Electric cooking is also likely to a considerable extent to constitute a special summer demand. Dur- ing the day, also, it fits into the noon-hour valley of industrial use or, at breakfast, comes ahead of the industrial demand. Heating of rooms by electricity is probably still some stages re- moved from practicability except in the homes of the very rich, or in regions supplied by underloaded hydro-electric plants, but sum- mer heating may not be impossible. Only water power under condi- tions of minimum use of flow seems quite equal to meeting the low- cost requirement necessary for the general-heating use. This off- peak condition has been met to some extent, perhaps experimentally »» Because of " early closing precluding consumption by stores of more electricity than residences," the Montana Range Power Company was held to have an improperly balancod schedule in charging residence customers 12 cents an hour against a merchants' rate of 6i cents. Electrical World, June 19. 1920. page 1449. « An Electrical World editorial (Feb. 7, 1920, p. 305) refers to the " potentially gigantic power load in our homes." 176 Electrical Eates rather than altogether practically, by storing the heat in water." Technically heat can easily be stored for a few hours while power and light, economically speaking, cannot be stored. Electric iron- ing, on the other hand, though it is also a heat use, is of established practicability and economy. But the use of electricity for house heating is in general not economically practicable." From the point of view of the electrical company, moreover, the load factor for atmospheric heating it bad. It is true there is a very effective competitor for electricity in much of this field, especially as regards cooking, in the form of centrally supplied gas. One might expect this competitive oppor- tunity to stimulate the ambition of the electrical companies to get the business. The two classes of utility, however, often seem dis- posed rather to divide the field. From a general point of view, it should be noted that in gas cooking the circulation of air through the flame is necessary, and this inevitably carries most of the heat away; also the savory volatile essences of the food go with the air currents. Electricity on the other hand is specially adapted to in- sulated cooking. Perfect control of temperature is one of the ad- vantages of electricity in this application that should count for much in cost and service comparisons. In the western part of the United States, it seems, the electrical companies have given much attention to the promotion of electric cooking, but not noticeably in the con- servative East. In general, the greater the nearness and closeness of the application to consumption and enjoyment, the less considera- " Tlie mfthod appears to be a practical success in Norway. Heat-retaining stoves ar« similarly hpatod at niglit in Switzerland. " A " Report on the Heating of Houses " by tiie IlydroEIectric Commission of On- tario, Feb. 28, 1918, states the gist of the matter thus: "Coal at $10.00 per ton is very much cheaper than electricity at 0.3.") cents pei kilowatt hour." The report also points out that tlie room for prospective increase in efflcipiicy in the burning of coal is great while in electric heating it is small. The Idaho Commission, which has to do with hydro-electric companies largely, says that " so long as there remains a field for the use of electric energy aa motive power, its use for house-heating is extravagant and wasteful." Electrical World, Nov. 29, 1919, page 1021. On the other hand, it is predicted by D. 1). Miller (Electrical World, October 12, 1918, page 693) that the industrial heating load will eventually surpass the industrial power load. But this means that certain heat uses in the chemical industry where mode and control of application of heat, rather than its quantity, are fundamental, will become increasingly important. Wholesale Rates and Quantity Discounts 177 tions of cost will prevail over those of convenience. Even so, the domestic heating field is not promising for electricity." Mechanical-power uses in the household are more economical of energy than heat uses, but their development without special encouragement will probably be slow. Vacuum cleaners, washing machines and wringers, electric fans, and sewing machine motors are only the more important among the possibilities. Refrigera- tion and occasional heating in the summer season are applications appropriate to the household that may be expected to become com- mon in the not distant future. Their development should be of particular interest to the electrical companies as tending to correct the undesirable seasonal variation of lighting uses. Eeference to the wattage'" of such motor and other appliances and to hours' use in comparison with that of ordinary lighting requirements make it evident that their adoption, together with the further spread of incidental heat uses, might easily double or treble the energy taken by residence consumers, among who the only regu- lar use of electricity at present is for lighting. This would mean diversification of use, thus bettering the residence demand in re- spect to what may be called quality, but still more decisively, it would mean intensification of use and density of demand. The gains to be made in the domestic field are not less in proportion than those to be obtained through putting the isolated plants out of business.'' It should be mentioned again that the urban lighting field is far from being as fully occupied by electricity, with regard to small consumers, as would seem desirable on economic grounds. The hold of gas lighting in this field is doubtless being steadily encroached upon. But much remains to be accomplished, as is indicated by the fact that consumers of gas in Xew York City are more than four times as numerous as consumers of electricity; ** The technical disadvantage of cooking and heating loads has been the subject of a warning by Arthur Wright to American companies inclined to encourage such business. Thermal efBciency requires close regulation of voltage and its full maintenance, which is costly and is comparatively unimportant for metal filament lamps. Compare 1917 Rate Research Committee Report, pages lSl-2. ^ The 40-watt tungsten lamp is a standard lighting unit. Toa.sters, flat-irons, percolators, and grills are of about 500 or 600 watts each ; vacuum cleaners and washing machine motors of about 200 watts ; electric fans and sowing-machine motors of about 40 watts. 3«The Utah Public Utilities Commission, re Moab Light & Power Co., in authorizing increases in rates, required the company on load-factor grounds to include household elec- tric appliances within the benefit of the cooking and power rate. P. U. R. 1919F 948. 178 Electrical Eates and the ratio is probably not much smaller for American cities generally. How far the displacement of gas as an illuminant should go depends on comparative costs. In terms of candle hours and at prevailing prices for small users, doubtless the direct com- parison of the standard tungsten lamp with the Welsbach mantle gas burner is still somewhat unfavorable to the former. The ele- ments of cost and utility favorable to electricity that are not taken into account in this way, nevertheless, probably justify the claim that electricity is already the most economical illuminant under practically all circumstances. Lack of density of demand is probably at present a greater draw- back of residence neighborhoods in large cities than bad load factor. But the possibilities of the situation should be decidedly encouraging to the electrical companies. ]\Iuch is already being made of electricity on the farm under conditions far less favorable in this respect, the general rural use of electric service being as yet out of the question. The special cooking and similar rates in actual use have com- monly a low kilowatt-hour charge but a high maximum consump- tion guaranty. It would be better to adopt the general rate to the possibilities in question by lowering the kilowatt-hour rate and coincidently protecting the revenues of the electrical company by a consumer or other service charge. Or an existing rate system can be adjusted by rating each consumer for expected ordinary use and allowing a low rate for excess consumption. In either of these ways even the smallest consumers would be encouraged, not only to improve the form of their load curves, but, also to contri])ute greatly to density of consumption. As to an excessive maximum demand resulting from the coincident use of nearly all the appli- ances in a household at once — the supply company can control the situation by limiting switches, double-throw switches (making cooking and water-heating alternative to each other, for example), and possibly by means of devices to record or coiitnil the demand at the time of the station peak. Reference has already been made to the possibility of bettering the station load factor by increasing diversity of domestic use through stimulating the sale, or in some cases providing for the rental on easy terms, of domestic appliances." Increased density •' See Chapter V. Wholesale Rates axd Quantity Discounts 179 of consumption is an even more certain and quite as important a source of prospective gain from such a policy. The policy of encouraging such consumption by pushing sales of appliances is much in evidence on the Pacific Coast and also to a nearly equal dcgTee in the Middle West. Despite war conditions, the Common- wealth Edison Company of Chicago sold $1,000,000 worth of merchandise in 1918,°* which was increased to about $2,500,000 in 1919." It should be of advantage to rent, as well as sell, the more expensive appliances like washing machines. It is possible also that less sympathy for " price maintenance " theories in these matters would be of advantage to the electrical companies. At the 1919 N. E. L. A. Convention it was predicted*" that in the next two or three years the largest growth in central station business would come from increased consumption by home devices and from the substitution of central supply for isolated plant gen- eration. The rate policy of the company represented by the speaker might color his expectations as regards the latter, but not the former, tendency. The public-service character of the electric sup- ply industry should mean emphasis upon such service to the great- est number, of course within the limits fixed by costs. The defects of the Wright rate from the viewpoint of load-factor considerations have been noted and it has also been hinted that, if reconsidered and readjusted with reference to density-factor con- siderations, its claims for more general employment might be greatly strengthened. The basic estimated kilowatt requirement would need to be little changed. But the adoption of a consumer charge might properly involve reciprocal modification of the so-called primary rate per kilowatt hour. This should mean, perhaps, a lower primary, but in any case an earlier reaching of the secondary, kilowatt-hour charge. The limit of the first block — the point of incidence of the " follow-on " rate — should be determined much more according to definite principle than appears hitherto ever to have been done. The number of hours use of the " max;imum " per month required before the consumer gets the benefit of a lower rate has frequently been adjusted to encourage cooking — why not to encourage domestic uses « Electrical World, Feb. 8, 1919, page 277. '» Electrical World, Dec. 20, 1919, page 1120. ■"> By Arthur Williams of the New York Edison Company. Electrical World, May 24, 1919, pages 1080-1081. 180 Electrical Rates in general? The ground for the adjustment in either case is the density factor. The limiting of the count for active connected load to lighting has a similar ell'ect. The discussion of the " follow- on " rate by the 1917 Eate Research Committee shows how hap- hazard has been the adjustment." A beginning of a conscious policy of emphasizing the density factor and intensive use might be made at his point. How Volume of Consumption May Best be Recognized Volume of purchases is generally recognized in all lines of busi- ness as a sufficient reason for specially low prices. This is because of the smaller unit cost where articles are handled in large quanti- ties. But the practice rests also upon the familiar general ground of differentiation, that is, the profitableness of rapid expansion through the acquisition of large quantities of new business. Of course the possibility of profit on account of the latter is conditioned by prices being kept above the limit of the separable cost of serving the large consumers. The justifiability of the policy of wholesale discounts rests upon cost analysis. But a company may possibly be clubbed into undue concessions by the special bargaining power of certain consumers — as the railroads have often been. It is also quite possible for a dealer to overreach himself in his anxiety to get large orders. In the case of a more or less monopolistic public- service corporation such a mistake might not reveal itself by it-s nat- ural consequences, since the company could make up the deficit on the favored class of customers by higher charges elsewhere.*" The difficult problem for cost analysis in this case is where to draw the line between separable costs caused by the particular ser- vice in question and general or joint costs that would have to be incurred whether that service were performed or not. Into the details of this analysis it is not necessary to enter here. It suffices to say that any class of business that hangs in the balance will be likely to have its separable cost rockonod closely. " N. E. L. A. Convention profeedinpi, General volume, pagen 178-181. ■"The 1D17 Rate Kesearrh Committee report refers disapprovinRly to "the questionable drift toward a ' blook rate ' for all services large or small ropardlpss of load fartors, and the very dancermis inclination to fix a maximum rate approximating what should be an average rate." Convention proteedings, General vol., p. 177. The latter tendency is very properly a'tsociated with the former, as appears in the discussion of consumer co^t from various viewpoints in this book. Wholesale Rates axd Quantity Discounts 181 There should be noted in this connection, however, a point to which attention has been called above," namely, that the sum of the separable costs of all classes of business added together will not equal total cost. There will be a very considerable difference between these two, which is accounted for by such cost elements as cannot be said to be due to any one class of business. Cost analysis confesses itself wrong where separated costs do add to the company's total. When this happens it often means that the costs for one class have been determined as residual, this class taking up everj^thing that is not already accounted for elsewhere. A comprehensive total unit-cost may also be obtained by carry- ing the process of apportionment through joint cost according to some more or less arbitrary scheme. The method of such apportion- ment is a matter of opinion, and the results ought not to be treated as of the same nature with separable costs. The plan of apportion- ment might better be applied to the undistributed cost as a conscious attempt at differentiation according to ultimate profitableness or to ultimate costs, so far as predictable, both these plans amounting in the long run to the same thing. The rate made to the very largest consumer should deal with the class, not with the individual as such." The danger from dealing with each individual separately is peculiarly great in the case of consumers especially interested in quantity discounts. Even if a particular consumer constitutes a class by himself in respect to size, he need not be treated as an indi\adual to be bargained with separately. The rate schedule should provide for the largest class of consumers by graduations shading into each other, just as the retail and wholesale rates should shade into each other. As to load- factor considerations, also, the adjustments of the rate schedule should similarly anticipate all needs. Special contracts not sug- gested by the plan of the rate schedule are justifiably condemned. There are reasons why one might expect the range of quantity discounts in the case of electrical rates to be small. We may assume that consumer costs are taken care of by a service charge of some ■" At pa^e 86 ff. " The Washington Supreme Court (State ex. rel. P. S. C. of Washington v. Spokane and Inland Empire Rr. Ck)., P. U. R. 1916D 476) : " ' Rates ' must be held to mean a charge to the public for a senice open to all and upon the same terms, and not a con- Bideration of a private contract in which the public has no interest." 182 Electrical Eates sort. If tlioY are not so disposed of, we should expect them to be absorbed in the initial or earlier rate blocks, thus having no appre- ciable effect on the range of quantity discounts. As regards the matter of delivery in small lots as against " bulk deliver}'," there is no reason here for a considerable range of discounts, since all low- tension delivery is under substantially the same conditions. Units are not discontinuous ; there is nothing corresponding to the carload lot of the railroads. There are no expenses for packing and han- dling. Selling expenses and the cost of making a market are un- necessary. On the other hand, quantity of demand may be presumed to be associated with density of demand. In so far as this holds, there is a basis for a broad range of discounts. It is true, also, that this factor is nowhere more important than in electricity supply. The transmission and distribution system costs about so much, whether much or little energy is sent over it. As regards the amount of copper employed, that will have to vary with the quantity of energ}' supplied, except so far as increase in the quantity supplied is due to longer hours' use. But all the other expenses of electric-line construction will in any case not greatly increase with the increase in quantity supplied in a given area. Extensions to new territory are, of course, a different matter. The degree to which this factor, which is the density factor, is of special importance for an electrical corporation is measured by the amount of its investment in transmission and distribution. The proportion of such capital to total electrical fixed capital — in which connection it should be remembered that the total in question is it- self accountable for a conspicuously large proportion of the cost of electricity — is, as has already been shown, especially large. But if the density factor, that is, the degree to which current is supplied within the limits of a given area — as measured, for example, by kilowatt hours per year per foot of block front — is a sound basis for discounts, is it not evident that the lowering of the rate should be pursued in conformity witli this principle of variation instead of merely according to quantity taken? Actual rate practice is far away from correspondence with what regard for the density factor would indicate. The application of the quantity-discount principle by the New York Edison Co. forcibly illustrates this point, in the general principle underlying the sche- Wholesale Rates and Quantity Discounts 183 dule as well as especially in the " merchandizing " contracts fostered, both of which matters have already been discussed. Terhaps it is just that the rate should be low under the circumstances prevailing where " merchandizing " obtains, but if so, should not it be such in proportion to the benefit of the density factor and should not the rate be substantially the same on the tenant's consumption whether made to the tenant or to the landlord ? :Merchandizing contracts are apparently a logical result of the company's willingness to sub-meter to any extent the consumer may desire. If so, there should be a charge for this service. And that would properly involve the gen- eral application of a meter charge. But the reasonable explanation of such policies is isolated-plant competition. It would seem that this method of meeting such com- l)etition is anything but satisfactory from a public viewpoint. On the other hand, so far as concessions are made on the basis of the density factor, there should be no objection to them in principle. If the central-station company's territory is dotted with isolated plants, it cannot make so high a degree of use of its transmission and distribution system as it would if it had practically all the business, hence if the serving of this class of consumers hangs in the l^alance it is justifiable for the company to compute cost without including more than a minimum amount for transmission and distribution. Such a degree of differentiation would inure to the benefit of all. The situation with regard to some large consumers, however, is modified, as has already been noted, by reason of the fact that they may be supplied by a direct line from the generating or sub-station instead of from the regular distribution system. Doubtless the cost per kilowatt hour for capital outlay and maintenance is in such cases very small. But such cost is in this case separable, hence the argu- ment for low rates to large consumers is, so far as it rests on the differential theory, weakened rather than strengthened by such conditions. A calculation that determined costs per kilowatt hour for the most favorable conditions as regards density would fix the proper minimum rate obtainable on account of volume of consumption at one place. This point once fixed, the policy of the company should be undeviating, regardless of whether isolated plants continue to be installed and used or not. The policy of an electrical company 184 Electrical Rates should be unanibieriioiis and undeviating because, from any point of view, isolaknl plants should not be built merely for bargaining pur- poses. Purely " business principles " are not likely to lead to the best results in such a situation. And in fact the protection from competition enjoyed by a public-service corporation should properly stop it from applying in the conduct of its business narrowly com- mercial, as distinguished from broadly economic, principles. The central-station manager naturally seeks to displace rather than to cooperate with isolated plants. For this reason little use has been made of a possibility of mutual advantage in dealing with the situ- ation. Because of the value of steam for heating in cold weather the isolated plant's cost per kilowatt hour of electricity is greater in summer than in winter. The unfavorableness of the summer situ- ation of the isolated plant tends to be heightened by the increased efficiency of lamps and the lessened need of energy for this use. The central-station, on the other hand, needs the summer business most. It should perhaps extend to private plants the advantage of a sea- sonal off-peak rate." The central-station cannot to advantage itself sell exhaust steam for heating, because its engines are of the con- densing type as well as because it is seldom near enough to the business center.** These suggestions should, however, await the spirit of cooperation on both sides. The isolated plant cannot rightly claim any advan- tage of cooperation and at the same time tlic unrestricted right to compete." ** The diverge attitudes of central-station men towards thia suggestion is shown in connection with a report on High Load Factor and Non-peak Business and the ensuing discusHion in the Commercial Sessions volume of tha 1914 Convention proceedings of the National Electric Light Assn., pp. 289, 290, 293. The economic advantages of the u«e of private plants to supplement central stations at peak times is discussed in a paper by Moses and Schaller, Co-operation between central-fftations and private power plants, in Power for June 12, 1917, p. 812 fl. Articles by central-station men favorable to the idea may be found in the Electrical World for July 24, 1920, and for Jan. 1, 1921. *• There is a possibility in the use of gas for lighting in winter when the heat adds to its utility, and of electricity in summer when the heat is of negative value. *' Mr. Lieb of the New York Edison Company sUites the viewpoint of the central station, though perhaps putting the tiase too strongly, as follows: "We are prepared to give ' segregated ' g'-rvice as an auxiliary to private plants at our regul.'ir rates without any limitations wha^ocver. We arc also prepared to give breakdown and au.xiliary service to Isolated plants nt the standard rates for this service provided for in our rate schedule. We are not, howe%er, prepared to funiish breakdown service to a so-called block lighting plant, which is not a f/ustomer's own plant furnishing service for himself alone, but is in effect a small central station supplying energy to a number of customers outside of the building in which the plant is located, making it an actual competitor of the lighting Wholesale Rates and Quantity Discounts 185 As to the method of applying the density-factor principle, the foot of block front, in view of its relation to the extent of the distribution system, would seem to be the best basis. Density-factor discounts should be figured per kilowatt hour consumed per foot. But this is suggested tentatively only. Administrative details and difficulties to be met in applying such a principle do ^lot need to be discussed here. Some account ' might need to be taken of the number and character of service connections for the block. But such discounts have no proper dependence upon whether the consumers in a block granted a certain volume of consumption— are one or many. The rate should be based upon the aggregate consumption in the block. But if some one or another consumer can be distinguished as taking more kilowatt hours in proportion to the space he occupies in the block than others, it is possible that rules might be devised to give such a one a larger share of the discount. The central-station manager may feel that it is no merit of the small consumer — for example, a residence consumer in a multiple dwelling— if he happens to live under conditions such as cause the consumption of a great quantity of electricity within the limits of a single block. Such a manager may also entertain along with this opinion the notion that it is a merit in the large consumer, perhaps a hotel proprietor or a manufacturer, to contribute to density of consumption by taking his electricity from the central station. But such a distinction would certainly not commend itself to the public as fair, and even as a matter of private business, it should not be forgotten that an increase in kilowatt hours distributed per acre is a matter of relative, not of absolute, quantities. It is obvious that increasing the consumption of a given number of residence con- companies, one over which the commission has not, however, assumed jurisdiction, these block lighting plants paying no franchise taxes and escaping the regulatory obligations and control as to rates, standards and conditions of senice, etc., that are imposed on light- ing and power companies bv the Public Senice Commissions law and the statutes of the state " See p. 583 of Electrical World, March 16, 1918. In the case of Acker, Merrall .<: Condit Co. vs. the New York Edison Company (Dec. 31, 1918), the New York Public Service Commission for the 1st District decided the company had no right to refuse senice to a block lighting plant, because the company cannot pick and choose among possible customers and because it does allow merchandizing customers to resell energj- in their block The mera operating of a generator is held not to make an electric plant in the sense of the law and not to be an essential difference. P. U. R. 1919B 287. This decision was reversed by the N. Y. Supreme Court, Feb. 1920, on the ground that the company should not be compelled to supply breakdown service to a competitor. 181 N. Y. S. 2a9. This decision has been affirmed by the Court of Appeals, the court of last resort in the state. 186 Electrical Hatk.s sumers is pro ianto a.s inijiortant as iiicronsinfj the use of rentral- stAtion energ)' by any otlier group of equal weight. Density is not a matter of the size of the consumer, but of getting all sizes and increasing all. Elasticity of economic demand is not a funi'tion of size; and there are general economic grounds, funda- mental to the nature of the curve of diminishing utility and econo- mic demaJid, for believing that elasticity of demand is greater at comparatively high prices than at low prices** Consumer cost hav- ing been properly disposed of, tliere is no reason why the small con- sumer should not get as nuuh proportionate advantage from density as the large. That central-station men think too much of bargaining power in this connection is evidenced by the fact that they are will- ing to deal with an aggregation of small consumers as if combina- tion affected the character of their demand (in the economic sense). It is true that all merchants do likewise, but the conduct of a public- service corporation protected from competition can be and should be different. The ambition of the commercial management of an elec- trical company to get all the business of all the large purchasers may easily exceed due bounds.** The selection of the street block as the appropriate unit for com- putations relating to density is of course in part merely a matter of convenience. Some other unit might serve the purpose better in some localities. But there is a possible general objection to any such basis, which should be considered. It might be alleged that density of consumption is purely a question of distance from the central station and tliat what is called for is the favoring of nearby or centrally located consumers. There are important reasons why such an argument is not sound. The location of a generating station within the district it serves is determined mainly with reference to available facilities and costs of production and only to a very minor extent with reference to nearness to the centers of largest consumption. Technical as well • " The eluKtlclty of demand in great for hiicb prices, and (creat, or at lonrt consldorable, for medium |)r|pei» ; but It declineH an the price falls; and (rriidiially (ndcs iiway if the fall ({(>*« »o far that fcutloty level is rearhcd." Marhh-iU, Principles of Kconoinlcs f>th cd. p. 103 (Hook III, rh. IV, piir. 2). ♦•The claiKrlo anoimetit for direct In preference to indirect taxation mlRht be npidied on behalf of irrnntlnK a rate yieldin(f little profit In the case of maniifncturerH and others who iwe current for purpose* remote from consumption, but the writer hns nowhere seen It so applied. \VH()I-KSA(,K KaTKS AM) QlANTITY DISCOUNTS 187 a8 coniniorcial considerations (tho latter having,' to do vitli the traiisportiition of fuel and the fonner pcrhajjs cliicily with the supply of water for condensation) favor a waterfront generating station. Transmission at liigh tension, furthermore, is much more eflficient than distrihution at low tension. JTence, whether a particular group of consumers, or a particular hlock, is nearer to the station than another is an accident that should not afTect the rate." In the case of outlying territory not offering enougli husiness to use the distri- hution system sufficiently, of course, distance may, in one way or another, be made a factor in the rate^ but not merely on density-fac- tor grounds. The fact that private-residence consumers, even in well built-up sections, are on the average at a greater distance from the generating station than other classes is sufficiently recognized in any attention paid to the density of their consumption. Moreover, their average distance from the sub-station, or their necessary aver- age distance from a sub-station of standard efficient capacitj', is of greater significance. How far extensions should be made that cannot be expected to pay for themselves for some years and must meanwhile be carried by the general business of the company is a question akin to the one just discussed. But it is at least a much larger problem, indeed too large for incidental treatment here. Adjustment of rates with reference to notions of equality of rights may easily carry the imposition of public duty so far as properly to involve taking the administration of the utility out of the hands of the private cor- poration. Disregard of distance (within reasonable limits) as a factor in rate-making — except, of course, in so far as the general average " The economic point along with others is contained in a Wisconsin decision in a pa-* c;ise in the following: "Legally there is no objection to basing a rate schedule upon distance differentials which will take care of the accumulating costs created by sening customers at increasing distances. This form of schedule when applied to different dis- tances within any city is objectionable, however, from a social point of view in that it discriminates in favor of the central portion of the city which tends to become congested at the expense of districts farther removed. It is also objectionable from an operating standpoint in that it might interfere with good engineering practice relating to the loca- tion of gas plants. Franchises have therefore usually reqtiircd that a uniform rate apply to all sections within which the utility is authorized to operate. This has been the case in Milwaukee. Rut as between two municipalities, these arguments do not apply and for this reason the West AUis rate schedule must be based upon its separate cost data." Wis- consin Comsn. — City of West AUis, vs. West Allis Gas Co. Apr. 19, 1916. 9 Rate Re- search 367. 13 ISf* ELrcTnic.M. Katks ili.staiu'o ol inui.-inis.-Kin and (ii>nil»iition must be provided for in general avera-xe rates — is in principle the same as tlie disregard of the character and cost of the hxnl distribution system, as to whether it is altcrniitin<;-current or direct-current, undergmund or overhead, etc. If such cdiiditions were made determining ele- ments in rates, regulating commissions would need to prescribe methods of construction in greater detail than they now prescribe types of consumer's meters to be used. As to commercial policy, the rule "to divide and conquer"' applies in relation to density as in other rospect.s. Where den- sity is low, the elTcct of encouraging more intensive consumption is likely to be greater than in the fully developed center of a city. If an isolated street bloik in an outlying section gets a low rate by reason of density, that fatt is of incidental advantage to the company as an example to neighboring blocks. Within the established limits of the distribution system, a single system of density dii^counts should lie impartially applied. It is hardly necessary to specify that density is a matter of ground area, not of floor space. But a rate based on floor spaic — as the Wright rate sometimes is — has density-factor characteristics. Under special conditions there may be sufficient reasons for granting a "development'' rate, of an experimental character, to a class of large consumers, hut in relation to all such actual or alleged exigencies it should not be forgotten that the density-factor rate should itself be by nature the greatest developer of business. What should bo the minimum rate per kilowatt hour obtainable merely by density-factor discounts depends upon specific conditions of o})eration. But some general propositions can be enunciated. Such dis<'ounts will naturally apjily when load-factor considera- tions do not. But the two ought to he applied in conjunction, and the combined result must b(» carefully calculated beforehand. On the score of density «liscounts alone, it would seem to the writer that the kilowatt-hour charge might decline — of course regardless of the absolute amount t^ken — to the level of the average wholesale rate, which Wf)uld mean a discount of about half the maxinunu kilo- watt-hour charge. Such a minimum should be subject to still fur- ther discounts on account of load-factor considerations. The foregoing disiussion of quantity discounts assumes a homo- geneous supply, i. e., low-tension energy supplied under ordinary WlIOLKSAI.K TvATKS AVI) Ql ANTITY DISCOUNTS 180 residence, store, ofiico, or shop condif ions. Ili^rh-tfiiHioii energy is different, sinro it ifi funiislicd in a conijiariitivfly raw statf and has to he worked over l)y the consunicr with rather expensive appliances and specially haiKlltd on acfount of (ire and casualty risk. Hence the hifrh-tciision rate may well he lower than the lowest low-tension rate. This, iiowever, is a special matter that need oidy he nientioiicd in a discussion of the j,^eneral foiuKhit ions of electrical rates. The makinij of the density factor an explicit element in rate.s is of the greatest practical importance in tiie sense that it seems to be the only satisfactoiT way to deal with a j)roblem that causes more trouble than any other phase of dilfcrential rates. Such a device would remove arhiirariness, wliii li has been the banc of dif- ferentiation. It would irive the devil — in this case presumably the large consumer, though it may sometimes be more nearly correct to identify him with the other partly to the arrangement — his due. Giving him liis due is a necessary means of preventing his getting more than his due. It would cut the ground from under the speci- ous argument that the load factor of the large consumer entitles him to special consideration on account of his size. The fact is merely that the volume of his consumption means the inclusion of much diversity within that volume, due among other things to the use of both light and power — a situation of no more advantage to the company than it would be if the different uses were metered separately and billed to separate consumers. The " increment- cost " analysis so often applied in this connection is al.so to a great extent merely specious because it supposes that the la.st comer is to be credited with all the density obtained, not always through him, but often merely wifh him. From an economic viewpoint, it is drnsihj of consumj)tion that the central station needs; not large consumers as such, still less composite or " merchandi/ing " customers. If, in order to main- fain density not substantially impaired by the transfer of consumers from the old classes to the new class. It seems to the writer that economists have tended to invert the natural order in assuming that the original or " normal "' condition is one of uniformity of price for all the units of a homogeneous supply. It is generally assumed that uniformity of price — whatever that may mean — is natural and to be expected; and that, conse- (juently, the investigators task is to explain why and how difTeren- liation emerges. The writer does not think this view is correct. Among primitive peoples, price, to the stranger at least, is deter- mined by individual bargaining without reference to any standard. Hven among peoples living under the conditions of Western civili- zation, especially outside the cities, uniformity of price, if it pre- vails, is something to be maintained by watchful care, rather than something from which any departure calls for explanation. The forces that maintain price uniformity, or a "' one-price sys- tem,'' furthermore, seem to be priniarily moral and oidy secondarily economic. Competition prevents the shojikceper from taking all the profit he can wherever he can, chiefly because each consumer becomes indignant if he finds ground for suspecting that he is paying more than others. The dealer known to be " fair " will get the trade. If, or so far as, a dealer can obtain a monopoly, he is, it is true, to a degree emancipated fnmi this restriction im{X)sed by the moral senti- ments of purchasers, liut even the monopolist will try to conceal or palliate discrimination. On the other hand, if the public will accept some kinds of differentiation as fair ami reasonable, the TlIK fiF.N'Klt AT, TliroitV n|- DlIM'KUKN'TIAL 1'aTES 193 shopkeeper ciiii priicti.M' ilir.-,c' witlxjut ilic jirotection of a monopoly. The retail trader sells goods with the added coiivenietice of eity delivery for the same price as that at wliieh he sells identical goods to he taken home hy the purchaser. He is often ready to pay express cliarges on sizeable orders to be sent "within one hundred miles of New York." His cash and credit prices are the same. He holds " special sales " so far as he can do so without losing too much trade at the regular prices. Your corner grocer would in many cases be quite willing to charge a different price to each different customer for the same good if he could do so without offending the commu- nity's sense of fairness. Not in all cases, of course, for in many other cases his own sense of what is fair and just would restrain him, apart from any pressure of public opinion. All this, it may be said, is because the consumer is willing to let retail trade be less analytically competitive than the purchasing dealer is disposed to allow wholesale trade to be. But this influence is still primarily the moral factor. Among dealers themselves, certainly the most com- mercially minded are not those least inclined to " shade " prices. One of the first things a combination does is to cut down extended and easy credits; that is, it docs away with one sort of differen- tiation. Book publishers cooperate to maintain uniformity of prices. The entrenched monopoly seems to be quite as willing to lump con- sumers as to classify them carefully, though differentiation usually pays better, especially when tlie product is subject to competition from other kinds of business enterprises. But in this case, and to a less degree in others, doubtless economic factors are working in the same direction as the moral factors ; notably, the cost to both dealer and consumer of making an individual bargain with each sale. The scope of the public's demand that prices be fixed and uni- form is, of course, limited by the perceptual discrimination of classes of goods as different from each other. But from an economic point of view it does not matter much just how the public draws the line between homogeneity and heterogeneity. Though the public still needs educating as regards classification, certainly at present it is disposed to tolerate much price difTerentiation. Regardless of whether moral public opinion or strietiy economic factors are the nwre potent in bringing about uniformity of prices, 194 Elkcthical Rates it should bo romlily adinitlcil that tlic only jiraoticahlc wav i)f doler- inining what goods are honK)<;oneou.s or wliaL articles holoiig in the same rlai^s is to let the question be answered by the common sense of the public. Grounds for the acceptance of dilTerences in prices may not appear in the material goods jjut in the supply of some- associated service; on the other hand, tlie public may refuse to con- sider relevant dilTerences in associated services, or in the goods or principal services, if the ditrercnces are small. In other words, two things belong for price-making purposes to different classes or to the same class according to what people in general think about it. If tlie public will accept a distinction between the carriage of cord wood and the carriage of coal a given number of ton-miles, the two services may be considered not homogeneous. Similarly the public may be willing to accept differentiation as between gas for fuel and gas for lighting, between kilowatt hours used for light and kilowatt hours used for power, between kilowatt hours sold to a church and kilowatt hours sold to a theatre, between a kilowatt hour that is one of ten supplied to one consumer in a mouth and a kilowatt hour that is one among ten thousand supplied to another, between kilo- watt hours used for lighting before P. M. and after G P. ]il. — or the public may not be willing to accept some of these distinctions. It is significant how well electrical supply puts to the test what sorts of goods and services one may consider homogeneous and what not. In an important recent discussion of this subject the question as to what is to be considered joint cost, and what not, has been made to hinge on the definition of homogeneity.* This seems to the writer insecure ground. At leai^t one would expect the definition to hinge on economic effects rather than mere physical qualities. The eco- nomic distinction between ])roduct and by-product should consist not in the fact that they are two — twoncss is a relative as well as a commonplace matter — but in the fact that contributions to the two supplies are closely bound together so that one supply cannot be increased in quantity without increasing the other at something like the same rate. Let the two supplies be distinguished any way you will. Absence of interchangeability or of the possibility of sub- stituting one for the other seems to be the j)ro|)er eccmomic criterion. " Figou and TbumIj In the Quiirfi-rly Journal of Kc-oiiomlo, vol. ivli (1912 13). pp. 378. C3£, C67. The General Theory of Differential Rates 195 The foiiii (if the dcniand curve is sif^nilicimt, hut hardly the decisive nuittor. If it were decisive, one might expect two articles ahsolutely alike to he sold to dilfereiit individuals at different prices, for utili- ties differ even more than tastes, since circumstances, especially com- plementary relations, as well as natural and acquired desires and in- terests, atfect utility. Granted that the supplies are two, or that they cannot ordinarily be substituted for one another, degree of control possessed by the producer over the separate supply of each is the important fact. No doubt some qualification is necessary, to the extent that the ex- ploitation of any by-product always involves some expense tliat would not otherwise be incurred, and this means that in no case is the supply of an economically serviceable article (an economic pro- duct) entirely unaffected by economic considerations or under en- tirely extraneous or non-economic control. From this point of view, joint production is a relative matter. It is only the extreme case of a situation that is common, and also important, even where the characteristic element in the situation would not in all degrees be understood as one of joint production and joint cost. When there is a physical facility available for eco- nomic exploitation but largely unused, of which the possible extent of utilization is indefinite, the situation is certainly worthy of atten- tion, whether we call it a case of joint cost or not. Quantity of physical performance may be in some determinate proportion to the service of a related demand though the performance is not of the nature of an economic supply. This is the case with back-haul empty cars. There is no economic supply until some small use is made of the empty mileage. The utility resulting from the unin- tended part (economically speaking) of the whole performance may be nil, in which case there is a failure of economic service or produc- tion. Or the situation may be that of physically idle, as well as necessarily at the same time economically unutilized, capacity. An electric generating plant must be constructed with reference to taking care of the peak of the load. Its capacity at any other time of the day and year is to a large extent unutilized. Some plants in small towns shut down during the daytime. If capacity formerly unutilized comes to be applied to drive motors for manufacturing purposes, are not the kilowatt hours so supplied to some extent joint 196 KLECTItlt'AI. Hatks pr(>tliht.>i Willi tlu' kildwjitt hours snUl ft)r li^^litin^' piirposos? If the intervals of small load ran he further e.\})loited, perhaps hy the use of electric energy for refrigeration, does not the same question arise, to he answered in the same way? Yet carefully measured physical units of a given form of energy would sccni to he ahoul as homo- geneous as anything can be, A similar illustration is alTorded hy street railways. Transporta- tion service offered may hest he measured in terms of seat miles operated ; and jiassenger service ecoiiomicaily e.\i)loited or enjoyed may he measured in terms of passenger miles ridden. A street rail- way cannot possii)ly so arrange its schedule that these two match each other, liack-haul seat miles — especially important during rush hours — are in effect a by-prodm t. Of course, most such seat miles arc no j)roduct at all in a strictly economic sense; they are an inci- dental waste of energy that might have been productive. But any attempt more fully to exploit such seat miles would naturally treat them as a by-product. These cases are analogous to that of a steam railroad that more fully utilizes its roadbed by differentially low rates for certain kinds of freight. That there is no fixed ratio between the quantities of the various economic services obtained from a single instrument does not seem to be of decisive economic interest. Even where the by- product is a material good, it may have any degree of importance subordinate to that of the main product, and the quantity obtained will often be made to vary somewhat according to its importance. It may be commercially worth nothing and still be a true by-product. Some cotton seed was always rc(juired for jilanting, but most cotton seed was long mere waste. The by-products of coal-gas manufac- ture are more variable and more subject to control, l)ut they are not therefore less truly by-products, than the cotton seed. Indeed, the gas is thns, traces the development and interrelation of the two points of view, but withiiut coming to any definite conclusion. IHvS Elkiti.i. Ai. IfAirs sources of suj)j)ly. if will not. I'.iil in fact tonsimicrs do not object to a lowering of the rate per kilowatt hour as the average hours' use increases. It is true that the conijjany will he in better |)ositiou to push its enterprise by way of difTcrential rates if it has a nio- nojwly hold on the original business. But the possession of large fixed capital only partly utilized seems to be more fundamental. The situation of a railroad transporting chiefly freight is some- what dilTerent, because tlie sui)ply does not have to be provided at the moment of demand. It is the necessity of producing at the moment of demand which makes the electrical rate question pecu- liarly interesting. But the carriage of a consignment of freight cannot be long postponed without the loss of the business. Even for the road with the densest traflic, taking the year as a whole, there is bound to be some falling short of complete utilization. The more important element in the situation, however, is the fact that railroad lines are built long before they can be fully utilized. Hence if they can get low-grade freight by accepting less than the necessary general-average ton-mile rate, there will un(iuestionably be sound economic reasons for thus dilferentiating. Though the increase of business will in time require double-tracking, the aver- age fixed charges per ton-mile carried will be less on a double- track than on a single-track road, so that even the imminent neces- sity of providing additional facilities will not mucii qualify the desirability of increasing business by dilTcrentiation. The Ameri- can public does not expect that, after due allowance for incidental ditferences in methods of handling, coal and manufactured products will be carried at the same (or equivalent) rate. It is feasible, as a matter of fact, to treat the ton-mile sold to the coal-mine operator, to the dry -goods jobber, and to the copper smelter as different "commodities." IJkewise with the kilowatt hours sold for domestic lighting and for elevator service. If a specially low rate is necessary in order that a railroad or an electrical company get a particular class of business at all, not only will that clai-s of shippers or consumers dcmiuid such a rate, so far as is consistent with the profits of the j)ublic-service corporation, but public opinion, at least that of the mercantile connnunity, will support such a demand. The j)roblem of obtaining a great volume and esjjecially a great variety of business in order to meet heavy fixed charges is TiiH riHNKKAi, 'l'iii:(ti;Y (ti |)ri I i;i:i.Ni I \i- 1\atp:s lOy certainly not pcculiiir to monopolies and certainly has a formative inlhioncc on difTcrcntiiil rates. If we could find a branch of production requiring heavy invest- ment in fixed and s()ecializcd capital where competition neverthe- less ruled, and if we should fmd difTerentiation then^ j)ractised in order to j)romote full utilization of ])lant, that situation would constitute the needed crm ial instance. Ocean freight rates appear to yield approximately such a case. Competition is keen and dif- ferentiation is practised, especially in relation to " berth cargo." The printing and publishing business affords another approximate case. If we consider the use of a set of book plates in printing to be a homogeneous service and one for which an equal charge for each copy impressed may be expected, then the sale of a $1.50 and a fifty cent book printed from the same j)lates, and differing only in the quality of the paper and binding to the extent of a few cents, is a case of differentiation. Of course, for each single book copyright gives a monopoly; but for the supply of popular novels, or of serviceable school books, which are tolerably homo- geneous as put out by various publishers, such differentiation is a competitive device. The devices by which different prices are paid for subscriptions to the same magazine constitute a similar example. The practice of charging less to new subscribers is well established and general. One's attitude towards the debate on this question — whether fixed charges or monopoly cause differentiation — will naturally be influenced to a considerable extent by the degree to which one accepts or rejects a certain false premiss of much economic reason- ing, to the effect that a given sort of economic phenomenon must be explicable by some single " cause." This is no place to argue the point at length ; the writer can only state his opinion that any phenomenon is explicable only by a complex of many antecedents, conditions, circumstances, or "causes" — call them what you will — and that primacy among them is chiefly a matter of the various degrees of what " goes without saying,'' of what will be mentioned by one who is careful to be comprehensive, and of what calls for particular attention as the decisive factor under the circumstances assumed or described. To suppose that a specified sort of effect has one and only one cause seems to be a sort of personification of events aud objects — a survival of fetichism. To illustrate by 200 Klectricai, Hatks rofcrentc to Mar>liaH\>; aiinloj^y o!" the scissors, and to tlio contro- versy rogardinp the explnnation of value to which this analorc low, is indicated l)y the joint-cost theory. Although wholesale discounts are not ordinarily hn»ught under the theory of differential prices, the writer has so classed them.' The fundamental reason for a difference in price according to quantity purcliased is of course of an entirely different nature. Hiit once such a dilTercnce is accepted, its degree may lie differential in mofive and effect, just as differences of quality and kind are e\|»|oilcd difrrrentially. It has been also pointed out by the writer that the conijH'titiou of the isolatcfl plant, affec-ting only large con- sumers, may be considered a justification for some degree of differ- entiation of the same nature. The cases are again mentioned here chiefly to illustrate the broad scope of llie principle. This particu- lar case of differentiaticju through wholesale j»rices also serves to * 8«« pajrc 103(1.. uIkivp. TiiK (li-.NKitAi, 'l'iii;'>i;v (II Dii ri;iti;NTiAL Kaii:'^ I'O] illuHtratc th(; fact that diiroreiitiation is not absolutely conditioned by monopoly power. The presence of a difTerenliiil ('l(iii''iit in methods of retail price- makings should also be noted in this connection. Hetailers deter- mine prices by adding to what was paid the manufacturer or wiiole- saler certain percentages ad valorem for handling the articles they sell. This procedure conforms to the principle of charging what the tralTic will bear — since the purchaser of the more valuable article is charged more without specific reference to the character of the service performed — rather than to a {)olicy of obtaining reimbursement for specific costs. The article that costs more at wholesale is not therefore of greater bulk or weight than the less costly article. Interest and insurance may add a trifle more to the basic original cost in the former than in the latter case. But such ascertainable differences seldom affect the percentages used. In fact, a good case could be made for taking the absence of dif- ferentiation of the ordinary type in retail price-making as an ear- mark of entrenched monopoly. Such a monopoly is indilTerent to the business offered by the individual small consumer, and is disin- clined to adjust to individual needs prices made or services per- formed. Price uniformity is in fact decidedly economical if the buyers are small and where they have no option. We should there- fore expect an adaptation of the method of differentiation to the situation described. That is what actually happens. Under such circumstances services widely varying in cost are often furnished at the same price, so that the profit varies greatly in a distinctly dif- ferential manner. This is one reason for the conventional nickel street-railway fare, though there are of course others. ^Monopoly tends to abolish careful graduation and external differentiation of rates. The fact that this tendency is a sign of monopoly powtr, however, should not be taken to imply that the change is never an improvement or never, even in the long run, pleasing to the public. At least, the suggestion is worth considering that the toucht-tone of monopoly policy is rather to be sought in connection with the treat- ment of small, than of large, consumers. It has been argued that rates can bo based on specific cost and in the long run should be; that all costs can be assigned to the pro- 202 FLrrTKK-M. Ratks ducts or services to which they are duo on the hiisis of the propor- tionate use the product,*! make of the means of production, and that, when this is done, there remains nothing to distrihute differ- entially.* All costs certainly can he apportioned. But that fact of itself is no more significant than is the possihility of ohtainiiig an arithmetical average of any fortuitous collection of numbers. It is also true that for most costs there is a fair and reasonable basis of apportionment. The exact whereabouts of the line of distinction between this problem and that of the disentanglement of separable costs — still by way of averages and for classes of commodities or services, not fur individual consumers — may bo dilhcult to deter- mine. Rails wear out, though it may take twelve or fifteen years, and their cost can be pro-rated on the basis of the use made of them, just as the cost of a trainman's wages is pro-rated over the objective services to which he devotes his time. But the likeness of the two cases is not complete. That the rails will have to be replaced some- time is not the fundamental point, though the brevity of the time during which a given kind of expense is effective — its rate of turn- over, so to speak — is an important aid in the isolation of costs. The causal connection between use and cost is more likely to be close wlien the period of use is short, especially when there is but one use obtainable, as in the case of a processive good like fuel.* The crucial question, however remains this: "Whether replacement becomes necessary after a given number of uses, and in proportion to vse, or after a given period of fimr, with little or no reference to degree of utilization. If a locomotive's expectation of life in full service is determined by miles-run only and not by obsolescence and the like, then this element in cost per locomotive mile is determinate and separable ; but if it is to l)e displaced at the end of ten or fifteen years whether it has run so many miles or twice as many, then average cost per mib- is not something to build on, but merely a 'Thin apppam to lie th'^ doniin.ant point of vlow of our piibliciitility coniniissionji. But HiiK* the fiiridiirnctiUil problfin for a nitc-rrifiiliitiriK boily iH (lie Ncpiiration and just appor- tionment of rost». it 1m hardly to \>p oxpofffd that such a body will attompt nicely to diKtinfrulnh Reparation from apportionment, espwdally »lnrr« the two shaile Into enrh other. * That in, In order that the ito-oalled " variable " costs ronform to the aiwumptlon ordi- narily made, (hey mu-.t be Kpe<-ial in time as well as s-pecial In iniiclenrc. TiiK rip:NKitAr- Tiri:<)i;v ok niiiKuiATiAi, T? \tks 20;] result of degree of utilization." I )ctt'rior;iti(in of rails, for fxamplo, is not proportionate to use; still less is that of ties. Jn fact, depre- ciation in general is as likely to be due to rotting or rusting out as to "wearing" out. The cases where deterioration is more nearly in proportion to time than to wear and tear are numerous. Espe- cially if obsolescence be taken into account, it is evident that the uses of tixed capital in general are, to a great extent, deciduous. If the fullest utilization is not made in season, certain potential uses are simply lost and the total cost has to be apportioned over fewer uses. Cost is, therefore, higher by reason of the failure of a fuller degree of utilization, such as might have been obtained, perhaps, by way of ditTerentiation. Cost accountants are too likely to assume relations as fixed which may change as a result of prices based upon their cost analysis. Eates for electricity based upon load-factor con- siderations most forcibly illustrate the insecurity of amount of actual use of fixed capital as a basis of cost apportionment. Differential rates may lower cost. Though unquestionably cost analysis is im- portant for this, as for any sort of price policy, a differential policy cannot be purely a matter of cost accounting after the facts have occurred. !l *■ I Fixed-capital costs in general are in proportion to time rather than to use ; hence the unit cost per use unit depends upon whether the price policy of a company promotes full use. This holds of carry- ing charges in general — of interest, rentals, and necessary dividends unqualifiedly, and of maintenance so far as proportioned to time rather than to use. In electrical industries obsolescence is partic- ularly important. Tlic importance of high degree of utilization as a reason for lower cost is clearer in the case of electricity supply than anywhere else because of the obvious special importance of the load factor as well as because of the importance of the more gener- ally effective density factor. * M. O. Lorenz in his article on " Constant and Variable Railroad Expenditures " in the Quarterly Journal of Economics, vol. xxi, p. 283, fails to see that these terras he employs as title do not siifficiently indicat« the important distinction, which is between expenses that vary with time (or etemit.v), on the one hand, and those that vary u-ith amount of wf, on the other. Nor is it of great practical importance that, if a railroad c<"iuld select from among the classes of business that come to it, after it has once become well established, it might be wise for it to take only the most profitable and not to expand — despite the im- portance of diversifiefl loading and the applicability to the situation of the general prin- ciple of increasing returns. 14 20 1 Ij 'Tikk \i I! a ri:s A conspicuous instaiui' of tlie falliuious assumption that appor- tionment accordin}:: to some measure of use yields separated costs is afforded by the discussion of demand or capacity charges in connec- tion with electrical rates. If we sujipose that the peaks of all con- sumers coincide and directly constitute the station peak, the respon- sibility for the latter is quite definite. But in any actual case there is more or les.^ diversity. Shall we discount each individual maxi- mum demand in the ratio of the general diversity factor? Or shall we make the demand charge of eacli consumer pro])ortionatc only to his share in the station peak, that is, to his " simultaneous " de- mand? Shall we then exempt from any demand charge the con- sumer who requires no current at the time of tlie station peak? In that case, what if the load becomes smooth and nearly or practically constant for four or five hours of heaviest loading? Is not the wliole question really one of policy, and should not the apportionment vary according to the needs of the company in building up its load factor ? Some small plants can better afford to shut down during the day- time than to run at all. Others may liave a daylight load about equal to their evening load. Is there any " use " rule of apportion- ment that will cover these extremes and the usual intermediate situation? ^fust not the company plan its rates with reference to the growth of business and adjust them accordingly from time to time, and is not this policy in contrast with, nay the opposite to, pro-rating costs and tlie procedure of most cost accountants? It should be added tliat not all cost-accounting employs averaging and pro-rating in the uncritical way just mentioned. A cost-ac- counting theory that might be called differential though its origin does not appear to relate directly to differential rates has been advo- cated and to some extent put into practice. According to this theory, the burden of carrying and maintaining unused capacity, and a large share of overhead expenses in general, should be charged to profit and loss.' Such procedure would promote the utilization of otherwise idle capacity, even though at a minimum or partial pro- fit. According to such a priiuiple, it wcmld not be necessary for a 'Cf. n. I.. flaiiU, The lUlatloii lirtwt.ii Pn-iludioii :iiiil Costi. in Traiiwif-tioim of th« Amrriraii Ho«l«'ty of Mi-ol. 37 (llM.i), p. 112. and Ihe followlnR dli rujmion ; aluo, by the tamt- author, rro(U» Kl,r,( TUK AL K'atks (lifTorcntiiition by wny of oontimious variation is usually supple- mented bv some classifioation. Impersonal and impartial classi- fication is rigbtly considered essential to justice in ratc-makin;?. Tlie problems presented are the avoidance of arbitrariness in the lines of distinction, the avoidance of overlapping; between classes, and the avoidance of heteron tliat likes shall be put to- gether and unlikcs kcj)t a})art. And all throe problems are perfectly solved in a rate that varies continuously according to some mathe- matical rule. In form, the superiority of such a rate is evident. A business-developing policy, however, usually means the appli- cation of a new class rate. This is justifiable as an experimental method, though it is desirable that ultimately such a class rate be merged in a general system in which the method of classification plavs a minimum part. One reason for the resort to class rates is the reluctance of the practical manager to disturb an existing rate structure to provide for the new possibility; he prefers to let well enough alone, at least to let any existing high rates alone. He wants to deal with dynamic elements as a separate matter and he may fail to see that the whole situation contains dynamic possibilities in greater or less degree. The connnon preference of managers for class rates, at least in the just-mentioned aspect of the matter, is likely to be supported by public o])ini()n to the extent that the class rates depend on easily identifiable objective criteria and easily discernible difTerences. But the requisite objectivity and definitcness attaches to things rather than to uses or to modes and conditions of consumption, lience the real purpose and function of a class rate niiiy be lost sight of. Cur- rent supplied to a motor-generator set and then used for the light employed in moving picture apparatus is properly entitled to neither the ordinary lighting rate nor to the ordinary pow(M- rate. " fvight- ing " is not a suflicient description of the use. But to base the rate upon the simple objective fact that the energy is supj)lied to a motor can be regarded as adequate only where means are treated as end. The objective criteiia of freight classification work better, liut idl clafisificalion reflects mere middle principles, valid only as working rules and methods of applying load-facti^r and density-factor prin- Tiiio <;i:ni:u.m- 'riii;<)!:v op Diii KiiiA'i iai. I{ates 207 (•i[)]ps and siK li dtlur kiioulfilirc of ilic cau.-al coiiiicctioii Ix-twecn costs incurred and sorvicp |)i'i luinicd as may I"' availalilc 'J'lic readi.'i" will <)l)scrv(! that in tlio pa-sent discussion no such fundamental opposition is found between prices based upon cost on the one hand, and ditferential prices on the other, as is ordinarily assumed. DiU'erentiation is properly based on cost analysis, but a kind of cost analysis that takes account of expected results as well as of present conditions; not on mere cost accounting;, which is a much more limited thing. If we wish to keep strictly to the cost- accouutinj; jjoint of view, there is a degree of oi)position Ijetween the cost element and the difl'erential element in price, the former being separable in fact and the latter merely apportionable accord- able according to some theoretical or arithmetical assumption. The writer can see little significance in the familiar, if not hackneyed, contrast between so-called " cost of service " and "■ value of service " theories. The latter seems to be a more plausible, only because rather high sounding, mode of stating the principle of '' what the traffic will bear." Cost, in the broad sense, should be of more de- cisive influence than value. The latter under a well-worked out dif- ferential theory operates only through the effects of price (value) upon cost. Cost is therefore the fundamental matter. But cost itself must be judged with reference to the volume of service that ought to result from cost. The strongest argument for differentia- tion rests on the general social ground that such a policy favors maximmn service to the public' From this point of view, aggregate cost, including therein a fair return upon capital (plus a premium for efficiency or minus a fine for inefficiency), should doubtless fix the aggregate of prices, since the rendering of the maximum volume of service requires that rates be kept down. It supposes low average rates because the lowest rates will be given to the most elastic or expansive kinds of demand, which will therefore count for most in the weighted average charge and cost in question. But separable cost fixes the lower limit of any rate for the obvious reason that an enterprise cannot prosper on out-of-pocket losses because there are " so many " of them. This statement is subject to qualification if there is a return to the com- • That cost not normally resulting in service should have no direct share in price is properly a part of the same view. The service must he performed efficiently in order that the claim to the return of cost, including necessary profit, be justified. 208 Electhicai. T?ati;s inunity that the reiipient of tlio diicit service will iiut ailequately reeogni/.e in tlic price he is willing to pay for it; but service of this sort cannot ordinarily be brought within the scope of the rule under discussion, or, when such a policy is indicated, tlie enterprise should be condui'ted by the government and not as an ordinary business alTair. However, it is only separable cost that must or can have a direct causal connection with rates for specified goods or services, and a quantitatively delinite elfect upon them. The remainder of total costs are properly apportionable according to general condi- tions and policies, so that the share allotted to a particular good or service is only in part due to its own characteristics. Doubtless all this is highly theoretical and will not by itself solve any concrete rate problem. But in matters of general policy — and differential rates come under this head — mistakes are due to a failure to develop clear ideas quite as ofton as to insufficient attention to the details of the concrete situation that confronts the practical man. Electrical rates are of great importance in another respect; not only in the general way discussed in the foregoing pages, but also in the implied suggestions towards carrying out a differential policy impersonally. The principle of maxinmm service is too widely and variously indicated to be deemed a contribution from the consider- ation of electrical rates. But two-charge and three-charge rates — even though these also are not quite peculiar to electricit}- supply — are distinctive and are characteristically suggestive. The superi- ority of such multiple-charge rates as a method of differentiation consists in the even and balanced impersonality with which the differential policy — so often under suspicion for unjust discrimina- tion — can be applied through their use. A single charge, it is true, can be so graduated that its variations are continuous. Hut it takes account of variation in only one dimension. Two principles of va- riation may be recognized by way of two charges; or, what is more to the point, one charge may be made to vary with separable cost«^ and the other according to differential principles. The electrical- rate demand cliarge is properly treated in the latter way. Both the kilowatt-hour charge and the consumer charge, on the other hand, reflect separable costs.* And there is also need of differentiation •The Ihrf'-rliarK'' '•Icftrlc-iil rat'* ii likn what a ruilroiiU ratv would be If it were com- powd of a tcrniiiiul chiirK** phii u iiiilc:i|{r charge, uiid Ihvu plus KomcthiiiK for tlio dilTer- edtial Ichidlrifc uf died rUsirnvH. The Gkn'khal Tiikohy or Diiiilkn 1 1 \i. K'ates 209 according to the divcirtit)- lacior. The desired impersonal quality appears to attach to mere quantity discounts; hut tlicse involve con- cessions to mere hargaininy power — which is directly opposed to im- personal justice in rate-making — and they encourage an artificial adjustment of service conditions. Pure quantity discounts should therefore he scanned with suspicion. Density-factor discounts are not open to the same objection. The "increment-cost" analysis that is ordinarily adduced in favor of an extreme application of quantity discounts in individual cases cannot be expected to result in the establishment of general and permanent rates. Classi- fication as a method of applying cost analysis, even though the analysis be correct, is crude as compared with methods actually in use in electrical rate schedules — though doubtless actual rates, even where there is back of them adequate analysis with reference to the different variables, will be likely to employ classification rather than multiple charges. From the rendering of maximum service to the public as a guiding principle, there is an easy transition to the fixing of rates with more or less reference to general considerations of public policy. To a certain extent this would seem to be a legitimate expectation in the case of corporations performino- scrvaces " affected with a public interest." A private corporation, however, even a public-service corporation, cannot well carry the principle so far as a government enterprise may. For the former the rule neveitheless suggests it- self : When in doubt, it is better to be public-spirited. Even though business men will transcend ordinary business principles and habits only when the application of these familiar guides leaves them in doubt, the twilight zone between what is and wdiat is not separable cost is so important that the attitude suggested would be of con- siderable practical effect in rate-making. The rule of maximum service is itself a rule of public policy, and the policy of differenti- ation in general should be pursued in this spirit rather than in one of mere profit-making. The policy of differentiation is not neces- sarily a mere commercial device ; it has a broad and firm foundation in economic principles that relate to enduring social welfare. (•ii.\r'ri:i; \iii CONCLUSION: SUGGESTIONS FOR A MODEL RATE SCHEDULE The ubliKution of loc:il adaptation and of simplicity. Tin- burduii of proof. A rate .sehedule should be tlynamic. The feature of a kilowatt-hour ihanje assunieii ; othei"8 to be disjcu.ssed. The load factor reviewed. The density factor reviewed. Latter to be di.'T?o.'«etl of first. Sunne.stions for a schedule. A, Meter charges; B, Kilowatt-hour charges; C Density-factor dii^countg; D, Load-factor discounts for wholtvale and other con.>;inuers; K, A coninuitetl-rate option; F, Minimum combined rate per kilowatt-hour; C!, Special rates, ofT-peak and other; H, Prices for lamps and special appliances; I, Hiph-tension rates; J, Coal dau.-^e. Politics as well as economics in rate-making. Technical questions and economic foundations. Immediate prospects. In order to give a tolerably complete view of a rate schedule from au economic standpoint, it will be sutlicient to deal mainly witli the most highly evolved situation, such as is found only in (lie largest cities. Of course any discussion of what an electrical rate schedule should be must recognize the requirement that it be adapted to local conditions. The general propositions below are therefore neces- sarily subject to (jualification. Even so, nmch of the outline will have to be left rather indelinite. The process of adaptiitiou, how- ever, will in general mean dealing with conditions less developed and les.s complex than those for which an ideal rate schedule would nat- urally be drawn ujj. In other words, we should expect .such a sched- ule to be amended and adaj)ted chiefly by way of simplification. There is indeed not only a presumption against complexity, but also a presumi)tion again.^t change, unless it be in the direction of himjililication. Kates resemble taxes in respect to the fact that what in simple and established should be considered lust until i)roof to the contrary is forthcoming. For every feature of a rate schedule other than the htraiglit kilowatt-hour charge tlie burilcn of proof i.^ on the proponent. However, what is established (»r now exists in ,'*neh .M-hedules is generally not simple, hence constructive thinking in the direction of relined adju^lments has freer scope than in most matters cents where such a small consumer takes energy only for i)ower and does not require himps; also, any consumer at his option, may supply his own lamps and thus ohtain the ()-cent rate. Knerg)' in excess of 12,000 kilowatt hours a year will he charf^ed at the rate of 5 cents per kilowatt hour under a contract for the full year (the actual rate heinf^ the avera«;e of the 5 cents for this excess and the G ccnti^ for the first 1^.000 kilowatt-hour hlock). hut with an additional half cent ]ier kilowatt hour if lami)s are included. This is the hasic rate for all large consumers, but is subject to dis- counts elsewhere described and of course does not ai)ply under spe- cial conditions, indicated in the rate schedule, entitling the con- sumer tx) a special rate. C. Density-factor discounts will be allowinl to each consumer, except as specified in K, on the basis of average consumption, within the street block to which he pertains, per foot of l)lock front, accord- ing to the following rules. For energy sui)plied to such a degree of density as to raise the density figure for the street block to 80 per cent of the average for the system, a discount of 20 per cent on the kilowatt-hour charge for energy taken in excess of the 80 per cent up to a 150 per cent figure is allowed. In addition, for energ}' taken above a density figure 150 per cent of that of the system, a discount of 50 per cent of the kilowatt-hour charge on such energy in excess of 150 per cent is allowed. These discounts relate to the kilowatt-hour charge only and are applicable to each month's bill according to the density figure attained by the consumers in the street block in question during the month. But the actual amount deducted in each month shall be the amount earned in the |)re- reding month, there being thus no discount made in collecting the first monthly bill and a discount due the consumer, upon his last bill, after discontinuance of service. The average density figure of the system, however, is to be com- puted in absolute terms for existing conditions, and applied without modification for three years, at the end of which period it is to be revised according to the average figure exj)erienced during the three years; and so on for each succeeding period. At eath such time of readjustment the new standard density ratios will be sul)niitted to the district pul)lic-service commission, which will determine whether or not a coincident readjustment (^f kilowatt-hour rates to give to consumers part of the benelit^i of gains in density is called for.' * KxiHTlprid' will (Joulitlrhh hiiK(ti"! Itoor Hpuie iKiiipicMl seeiiiH t« he a proper ba»l* fur aucb alluc-atioii. Suggestions fok a Moih-j, K'aii: SfiiKDri.K 215 I). Whok'salc (•(iiisunicrs iakinj^ not less than 120,000 kilowatt hours a year or inoro arc ontitlcfl to a flomand rato of tho Hopkinpon tvpo instead ol" payin^^ 5 (Splits per kilowatt hour. Any conRiimep takin<]^ as iiuicli as 15,000 kilowatt hours in any month must he charfjed ujion this hasis, oxoopt as noted under F. (Consumers of smaller size, hut such as take not less than 1,000 kilowatt hours a month, are entitled to this rate upon claiming it and confonning to the conditions prescribed in A, The basic wholesale rate shall be $;Ui j)er year per kilowatt of demand plus 3^ cents per kilowatt hour. Bub the kilowatt-hour charge shall be subject to the density-factor discounts specified un- der C. The demand charge shall also be sul)ject to discounts with reference to the diversity ratio, or else shall be based upon the mean of the consumers individual kilowatt maximum and his simultane- ous demand.' The maximum demand of a consumer shall he determined by meter and, except as specifically otherwise provided, by one that records the consumption during each five-minute interval. The peak maximum demand of a consumer, except as specifically other- wise provided, is understood to be the highest recorded average kilo- watt rate of consumption during any 30 minutes within the year. The amount of the demand charge due under the year's contract is thus not finally determined until the close of the contract year and must be estimated for each month according to definite rules, adjustment being effected at the close of the year. It is considered in conformity with the rule if the average maximum for the 4 winter months be taken as the consumer's maximum for the year and for every month whose maximum does not exceed this average, the demand charge for each such month of excess to be computed on the basis of the month's maximum. In the case of consumers whose load shows the normal seasonal variation, up to July 1 or thereabouts the preceding winter maximum will apply finally in all calculations; and after July 1 demand charges paid will be subject to revision according to results shown in the succeeding winter. The electrical supply company may make any needed and rea- sonable regulations and sti])ulations providing for surcharges de- signed to compensate for or to depress large momentary demands 'The scheme of diversity ratio discounts might be as follows: Whenever the diversity ratio of any consumer under the demand rate shall exceed 20 per cent, that consumer becomes entitled to a discount of 1 per cent on the demand charge, and for each point per cent diversity ratio in excess of 20 he shall be entitled to a larger discount determined by addintf 1 per cent to this figure. Thus, for a diversity ratio of 21 per cent, the discount will be 2 per cent; for a ratio of 22, 3 per cent; and so on. Where the diver- sity ratio exceeds 120 per c-ent or more no demand charge will be made. The diversity ratio will be computed for each nmiitli or other l)ill period with reference to the average kilowatt demand on the system during an hour (or longer period if preferred by the com- pany) specified in advance by the company for the month in question. 2 It'. Electiucal Katics and irromilar fluctuations of the consumer's {loinniitl durinfr peak or other Iiours. K. Any consumer taking less tlian 1000 kilowatt hours a month shall, ujion npplii>ation, be jjiven a ratinp: for normal consumption in kilowatt hours per month, hased upon character of load variation, diversity and intensity of use of appliances, and density of demand, as interpreted according to published rules, the normal figure so determined being subject to variation with reference to the four sea- sons in such a way that, while the average of the four seasonal figures shall e(|ual the basic figure, the four may vary in relation to each other in substantial conformity to the seasonal variation of the need for lighting or in accordance with some other factor controlling the seasonal variation of the demand. In lieu of all other discounts — for load factor, diversity ratio, and density factor — a consumer so rated shall be entitled to a rate of 2^ cents per kilowatt hour for excess consumption above the amount specified in his rating. A con-sumer taking less than 100 kilowatt hours a month shall have available to him only this option in lieu of being i)illcd at the stand- ard rate, F. The company may fix a minimum kilowatt-hour rate, after all discounts have been applied, of H [ ?] cents straight per kilowatt hour for any wholesale low-tension consumer. This refers only to the per kilowatt-hour element in the rate and not to other charges. G. Special rates (not covered by the published schedule) for cer- tain specified classes of service may l»e oiTcred by the company at not less than the smallest rate obtainable under the terms prescribed in D. Notice of any such special rate, explaining its puri)ose, shall be sent to all consumers who may be presumed to be interested by reason of similarity of service and other conditions. In general, the purpose of such rates is experiment and the development of new business. All special rates shall be optional with the consumer, but 8ul)ject to discontinuance upon due notice at the will of the com- pany and of the district public-service commission. A straight kilowatt-hour rate of not less than the minimum kilo- watt-hour charge obtained under I) may be ofi'ered to exclusively off-peak service, reckoning the peak time at not less than two hours each day. But the consumer in such a case shall, in addition to the kilowatt-hour payment, recompense the company for all meter and administrative costs incidental to his special service. Special breakdown and auxiliary rates and contracts for private plants shall be olTcrcd, but shall be conl'onnaljle to the rules above stated. Street lighting should receive a special rate, determined by con- tract with the municij)ality, confonnable to the rules above stated. Such special rates may be flat for street lighting, sign lighting and similar classes of service, but only where the quantity of energy Sri inicnts of the future may affect eleetrical rate schedules by chan^inj]: the conditions presup- posed in an economic analysis of the existing,' situation, there can scarcely he found a more interesting problem in rate analysis thnn is afforded by the subject of the present work. Nor is the i^ignili- cance of such analysis limited by the continuance of the dominant importance of the load factor in electricity supply. In the long run economic considerations should control tiic policy and attitude of regulating bodies and courts towards electrical rates. Rates that favor the most economical, that is, the fullest, utiliza- tion of capital should he, not merely jiermissive, l)ut prescribed. So long as the load factor has its present economic significance, the ren- dering of maximum service can be effected only through an appro- priate rate schedule. The mere averaging of costs, whether by few or by many rate classes, and whether on a straight kilowatt-hour basis or according to some more recondite form of the idea that cost can be comi>letcly pro-rated per use unit, will not suffice. The con- sumer ought to be given an inducement to promote the lowering of cost. This is entirely practicable, at least with large consumers. Differentiation with a view to maximum service is needed. Confronted with present conditions of economic uncertainty and unrest — which the electric central-station industry shares with other kinds of business without having had their ojiportunities for profit.s from the War — the practical central-station man will doubtless find the overshadowing problem of getting an adequate return a barrier to giving much attention to questions of detail as to comparative rates for difTerent classes and conditions of consumers. Trogressive economic changes, however, are especially likely to be nurtured by unsettled conditions. Kate readjustments will b(> initiated but not perfected under the pressure of emergency. More and more atten- tion will be paid to getting the right kind of linsinc«s and snjjplv- ing existing customers through the right kind of rates. We may therefore lo(jk forward to the grailiinj elimination of arbitrariness or of the too free exercise of options by the conipanv in determining Sr(;(;i;sTi()Ns for a Mouki, I{ath SciiinuLK '>][) the consumer's demand under load-factor rates. Ami (|iiaiitity dis- couni'^ may be expected to be ^rradmilly purj^'ed of the suspicion of being unduly influenced by bargaining power. It is not possible to say exactly where a correct balance will be struck between over- refinement in adapting the rate to particular conditions and injus- tice in the grouping together of consumers with dilferent charac- teristics; but it is safe to say that fuller knowledge of the facts pertinent to such determination will be developed and with it will tome better application of such knowledge. 15 INDEX OF NAMES (Where a page number is followed by the letter n the reference is to a footnote.) Acker, Men-all & Condit case, 185n. Adams, Comfort A., 6. American Academy of Political & Social Science, Annals of the, 60h. American Economic Review, 30/1. American Institute of Electrical Engineers, 12, 12n, ISji, 14, 128. A. I. E. E. Proceedings, 28n, 36/1, 62n, 94n, 167n. A. I. E. E. Standards Committee, 49. A. I. E. E. Transactions, 169n. American Society of Mechanical En- nccrs, Transactions, 204n. A. S. M. E. Journal, 28n, 169n, 204n. Association of Edison Illuminating Cos., 13n, 62n. Assn. of Edison Illg. Cos. Commit- tee on Load Factor, 14n. Astbury, Justice, 122n. AubuiTi, N. Y., 89?^. Baltimore, 25n. Boston, 146n. Boston Edison, 24, 37n, lOOn, 121n. (British) Board of Trade, 144n. (British) Institution of Civil Engi- neers, 5271. Brooklyn Edison, 18, 18n, 24, 76n, 93n, 95n. Brown, Will, 32n. Burnand, W. E., 56n. California Commission, 60n, 167n. Carpenter, Prof., 16Sn. Chicago City Council, Report to Committee of, on Gas, Oil and Electric Light — Investigation of Commonwealth Edison Co., 16?i, 21». Chicago. 20, 21, 22, 23, 59n, 13471, 146?i, 161. Chicago, Milwaukee & St. Paul llailwav, 146n. Clark, J." M., 197n. Cleveland Electric Illg. Co., 24, 76n. Commonwealth Edi.son Co. of Chi- cago, 16, 18, 20;i, 23, 23;i, 28/t, 74n, 90n, 131n, 159?i, 169n, 179. Consolidated Gas, Electric Light & Power Co. of Baltimore, 25n. Consolidated Gas Co., New York City, 143«, 158ft, 173. Crompton, R. E. B., 52n. Detroit, 146n. Detroit Edi.son, 24, 91. District of Columbia, Public Utili- ties Commission, 78?i. Doanc, S. E., 125n. Doherty, Henry L., 70n, 126n. Dow, Alexander, 86n. Edison " Jumbo " dynamo, 27. Eisenmenger, H. E., 129n. Electrical Review & Western Elec- trician, 129/1. Electrical World, The, 23n, 27n, 32n, 56n, 57n, 76?!, 77/!, 78n, 91 n, 93n, lOhi, 126r), 129n, ISln, 137n, 140n. 145n, 146?i, 167n, 172«, 173n, 175n, 176n, 17971, 184/1, lS5;i. Electrician (London), The, 5ln, 53n, 60?i. Equitable Building, 167/1. Erickson, Halford, 60n. Fall River Electric Light Co., 76n. Ferguson, Louis A., 62/i. Flatbush Gas Co., 18, 18n. Ford Motor Co., 1677K Freeman, 68/1. Gannt, H. L., 20471. Gear, H. B., 129n. Gear & Williams, 12S«, 12971. Georgia Railroad Commission, 166n. Greene, W. J., lOln, 126/1. Hackney Municipal Council, 122ti. Hale, R. S., 137/1. 221 222 Electrical Katks Ui\\\ of Rocortls Power Plant Kcptirt, 168n. HnniKin. 65ri. Hupkinson. John, 51, 51ti, .')2», GOh. llydro-KliM-tric Commission of On- tario, 176n. Idaho Public Utilities Commission, 13,5n. Illinois Commission, 26n, 29n, 47n, 66ri. 77n, 90n, 113n, 159h. Indiana Commission, 90n. Insiill, Samuel, 2Sn, 131«, 169, 169n. Interstate Commerce Commission, 35n, 154n, Ives, 172n. Junior Enpinecring Society, Trans- actions, oln. Kapp, Gisbert, 56. Lieb, John W.. 138n, 151n, l.S4n. Lincoln, Paul M., 28n, 36n, 62n, 94n, lG7n. Llovd, E. W., 96n, 145rj. Lorenz. M.O., 203n. Lubarskv, L. H., 6. Lucke, Prof., 168n. Maine Public Utilities Commission, 119n. Maltbie, Commissioner, 92n. Manhattan, 139. 143n. Marshall. Alfred, 186h, 200. Mar>-!an-, F. D., 277i. New IIanip.>^hiie Commission, 102n. New Jersey Public Service Com- mission, 71;i, 77/1, lOOn. New York Citv, 16, 91, 91n, 121n, 14371, 169. New York Court of Appeals, 72«, 185n. New York Ivlison. 18, ISn, 21n, 47n, .52n, 73n, 74 7i, 767i. 92h, 937i. 1347i, 1.58. 1.59. 161, 168n, 169«, 170, 172, 182. 18471. New York Edi.son and United Elec- tric. 23, 8971. 1.59. 170. New York Public Service Commis- sion, 1st District, I871, 737i, 91n, 9271, 9371, 9571, 10271, IO871, 113;i, 12271, 13971. 14371, 1.5971, 1737i, lS57i. New York Public Service Comiuis- sion, 2d Di.strict, 29, 54, 727i, 77«, 9371. 10071. 11571. New York Si Queens Electric Light ,t Power Co., 23, 767i. 93n. New York Sujjreme Court, 185n. Norway, 176«. Ohio Public Utilities Commission, 71ti. 72h, 8971. Oregon Comiiiis>«ion, 47«, 148n. Pennsylvania Ptiblic Service Cora- n)issif)n, 77ri, 79h. Pliiladelphia, 94n. Philadeli>hia Electric Co., 24. I'igou, 194. I'otomac Electric Power Co., 78n. Imdhx of Names 223 Power, 184n. Pratt, F. C, 146n. Public Service Mlictric of New Jer- sey, 21. Quarterly Journal of Economics, 6, 7, 37n, 151«, 194h, 203n. Rate Book, N. E. L. A., 32n, 4-1n, 48t?, 5hi, 53?i, r)6ri. 66n, 68n, 76, 76n, SO?i, S2n, 89h, <»3«. IGln. Rate Research, 2rvi, 26n, Sin, 53n, 62n, 65n, 6Gh. 71», 72«, 77n, 79h, 90«, I02n, lloH. lH)n, 123n, 135n, 138n. 14Sn, 169?!, lS7n. Rate Research Committee, N. E. L. A., 44/?, 45n, 47, ')!», 52, 52h, 64, 66«, 76, 78, 80«, 96«, 100«, 110?i, 111/?, 113/?, 121/?, 129/1, 138n, 155n, 170/?, 177/i. ISO. 180/?. Richardson, H. W., 57n. Rochester, N. Y., 146/?. Rochester Gas & Electric Co., 77;?. Rockford Electrical Co., 77n. Sandusky Gas & Electric Co., 173/i. Schenectady, N. Y., 57/?. Scovell, Clinton H., 204n. Seattle, 145/?, 170/?. Siegel, Gustav, 5ln. Standardization Rides of A. I. E. E., 12. 12n. Statistics of Railways in U. S., I C. C, 35/1, 36/1. Steuart. C. E.. 173/i. Switzerland, 176/?. Tuu.K.sijr, F. W., 6, 191. Union Electric Light A Power Co., 167n. United TStates Census, Abstract of 13th, 168n. U. S. C'ensu.H, Efrtimatcfi Valuation of National Wealth, 36/i. United States Census of Central Electric Light and Power Sta- tions, 34, 142n, 168n. United States Census of Electrical Ind\istrics, 34n. United States Census of Manufac- tures. Abstract, 36n. T'tah Public Utilities Comrai.ssion, 177/?. Walli.s, 12.5n. Washington, D. C, 170/i. Washington Supreme Court, 181r?. Watkins, G. P., 7, 30n, 37/1, 151n. Williams, 179n. Williams and Tweedy, 108n, 109/?, 146/?. Wisconsin, 37, 37r?, 39, 112. Wisconsin Commission, 28, 28n, 47n, 53, 55/?, 58. 59/?, 60/?, 100/?, 119n, 125. 141, 187/?. W^isconsin Electrical Association, 60/?. Woolworth Building, 167;?. Wright, Arthur, 53, 60/t, 69/?, 132n, 177/?. York, Pa., 89n. INDEX UF SLl'JKCTS (Where a page number is followed by the letter n the reference is to a footnote. At the boRinninR of each chapter is a condensed outline to which, also, the reader is referred.) Apjiliances. s;ile and renting of by central stations. 178. Averages, use in rate classification, Ill- Averaging, of peaks in determining demand. 61 ; as a concession to diversity. 61 ; as based upon di- versity, 1.51 ; limitations upon as a basis of rates, 202. Bargaining power as a factor in rates. 166, 183. Block-front foot as a basis for den- sity-factor discounts. 185, 186. Block method of graduation, de- scribed, 45; differs from usual whnk"s;ile discounts, 46 ; compared with step method by means of curves. 47 ; also applied to the demand charge, 52. Breakdown rate described, 42, 64 ; for isolated plants, 66; actual variety of use of energy under, 67. Carbon-filament lamps obsolete, 95. Central stations, individual capaci- ties of in various states, 28. 29. ChiHsification, !is a rate-making de- vice, 106; need of avoiding arbi- trariness, 113; u.se of averages in, 114; not an advanced nietliod of rate-making, 115. Cl;u« rates in general. 111; occupa- tional, 112; as development rates, 206. Clock's share in demand metering, 63. Coal clause, early examples, 76; ex- tent of adojjtion by 1919, 76; not applie^. 92n; as a means of avoiding di.>' that pro- vides for difTcrcntial prices, 20-1. Cost analy.sis should not load unjis- signed items on a residual cl.iss, 181; apportionment not the siuue as separation of costs, ISl. Curv(>s of load v.ariation, 15-22; per cent index form de.>ular interest in a low maximum, 92. Initial co.st, 87. Initial qualifiers of the kilowatt- hour charge, 43. Intensification distinguished from extension of use, 143. Interconnection of power plants, 33. Isolated i)lants as a comi)etitive fac- tor in rates, 166, 1H3; ecimomy of us comjjared with central-sta- tion service, 167; imjjortance as measured by kilowatt iiours gen- crated, 168; nlation to combining tenantji' and landlonls* consump- tion, 170; eiTects of war and coal costs ui)on, 173; j)ossible co-oper- ation between them and central stations, 184. Joint cost, 194 ; u nuitl'stera computed, 158; riders favoring quantity, 159; extent under a load-factor rate system computed, 161 ; not confined to the kilowatt- hour charge. 162; demand blocks under a Hopkiason rate not an ap- KLi:(ii;ir\i, Kates jiropriatc phicc for siich difcounls, 1G2; density factor the sound basis for, 163; reasons wliy lluy niiplit bo cxpocti'd to be small in elect ricity supply, 181. Railroad rates, analogous to electri- cal rates, 12. 150. Railroad rate differentiation af- fected by possibility of delaying shiimient. 198. Rate elements onuraeratcd, 42. Rate-makinn, immediate and more remote prospects, 218. Rate schedule described, 41. Rating of generators, 30. Rebating possibilities, 171. Reserve capacity in relation to rates, 152. Residence use, of artificial light easib' estimated, 136; diversifica- tion of should be encouraged, 174; of motor appliances should be encouraged, 177; lack of density in more important than low load factor of, 178. Residual method of computing cost unsound, 86, 118. Retail prices, likely to be differen- tial, 201. Seasonal consumption in relation to the sers'ice charge, 100. Seasonal variation of demand, a load-factor consideration, 132; re- lation to monthly vs. annual com- putation of rates, 133, 134; the unavoidable disadvantage of light- ing use, 136. Separable co.st, refers especially to initial charge and to kilowatt-iiour charge, 83; a lower limit on price differentiation, 207. Service charge, defined, 68; types dewribed, 69; either consumer or meter favored as promoting busi- ness development. 103. Service units in relation to rates, 120. Simidtaneous demand, 129. Sin.ill con.simier, cannot be suppli<'d under strict load-factor rates, 137; Wright rate jm make.shift. 138; diversified use by shoiild be en- couraged, 140; also intensified uw. 143; rate for might well re- quire gmaller hours' use by in summer, 143; entitled to consider- ation umler density-factor rates, 1S(). Small power u.'Jtrs. social importance of electricity for, 174. Special rates. i)lace in a model rate .-riiedule, 216. Special rates to .street railways. 163. Si)ecific co.st not a complete basis for rates, 201. Step method of graduation, 44; more familiar to the public than the block method, 46; condemned by commissions and others, 47. Straieht-line meter rate, 43, 48>i. Surciiarge, 80. Technological developments in rela- tion to future rates, 217. Two-charge or Hopkinson rate, 51. Uniformity of price, not the origi- nal or normal condition, 192 ; suii- tained by moral force of public opinion, 193; the conditioning homogeneity of goods a matter of the attitude of the public, 194. Use, classification based upon not practicable for electricity, 112, 122. Value-of-service theory of rates, limitations and dangers of, 121. \'()lumc of con.-^uuption, how best recognized, ISO. Wage claus(% 79 ; public policy in- volved, 79. Wholesale and retail, where the di- viding line. 155. Wholesale price not strictly appli- (•al>Ie to electricity, 155, 163. Whoieside prices often differential, 200. Whol(\s,ile rates described, 41 ; af- f((ted by differentiation. 153. Widtli of first quantity block. 88. Wri^'lit rate, descrii)e(i, 53; mo.st generally employed load-factor rate, .')4 : computation appears simpler th.'in for Ilopkin.son rate, 54; possibl(> other than load-fac- tor use, 55; connect em-7.'ai HD 9685 Watkins - ^A2W3 Electrical cop.l rates. ^ ^^58 07288 HI 5165 CJCrIp .1 ,„,,. oirifi.yii I IRHAHY ttClLlTi' AA 000 766 677 UNIVEK.M 1 . a.il^UHNlA LUS A>'GELEiJ LIBRAKY