franchises and simultaneous with such surrender a franchise issues to such corporation by operation of law, which embraces the surrendered franchises as previously modified by the regulatory powers conferred upon the Commission. In other words, it places the corporation upon the same basis in all respects with corporations acquiring their privileges of doing business in the communities which they serve since the act became effective. By limiting the time within which such action could be taken by public utilities it was believed at the time of the passage of the act that the opportunity of securing exclusive rights and privileges in perpetuity, subject, of course, to the right of purchase by the municipality of the active properties of such utilities, would be a sufficient inducement to cause a surrender of all secondary franchises within the period fixed by the statute, but much to the surprise of those who conceived the plan less than one in ten of the public service corporations availed themselves of the privilege. Various reasons have been assigned for the general failure of such corporations to act in accordance with the desire of the legislature, but the controlling reasons for the attitude assumed by such corporations in the matter seem to have been (1) a doubt as to the legal right of the directors and stockholders to make the surrender without the consent of the bondholders whose mortgage security covers and includes the franchises of the corporation, (2) the practical impossibility of ascertaining all the bondholders and acquiring their consent, and (3) the erroneous, though perhaps not ill-founded, conception of the value of such franchises. The latter reason was advanced in but few instances and is scarcely tenable. As all secondary or special franchises granted directly or indirectly by the legislature are non-exclusive, subject to eminent domain by municipalities, and resting entirely upon the good faith of the people of the state, as they may be repealed at any time by the legislature, I can see no element of value in such franchises that makes them a more desirable acquisition of a public service corporation than the practically perpetual exclusive franchises provided by the statute.

The fact that a new phrase, "indeterminate permit," was coined and employed in the act to denominate a franchise when used in its generic sense, that is, as embracing all the secondary or special franchises granted to a public service corporation, either directly by the state under general legislative provision or indirectly by the state

1 NOTE. Sect. 1797m-1. 5. The term "indeterminate permit" as used in this act shall mean and embrace every grant, directly or indirectly from the state, to any corporation, company, individual, association of individuals, their lessees, trustees or receivers appointed by any court whatsoever, of power, right or privilege to own, operate, manage or control any plant or equipment or any part of a plant or equipment within this state for the production, transmission, delivery or furnishing of heat, light, water or power, either directly or indirectly, to or for the public, which shall continue in force until such time as the municipality shall exercise its option to purchase as provided in this act or until it shall be otherwise terminated according to law.

through a common council or other municipal body duly authorized thereto, has had a deterring effect upon such corporations and notwithstanding the legislature has again opened the season for exchanging franchises there has been no perceptible change in the attitude of the corporations toward the proposition. The statement often made, that until there has been a judicial interpretation of the meaning and scope of the phrase "indeterminate permit" corporations will hesitate to trade their rights or franchises which have a definite meaning in the law for those that have not yet been defined by the courts, does not appear to have any substantial basis for support. In fact, the statute contains as explicit a definition as is possible to make and leaves nothing for interpretation or explanation.

As the utilities are generally desirous of canceling their long time discriminatory contracts with municipalities for service for municipal purposes and those with individuals for private purposes, it would have been, perhaps, better if the legislature had in the first instance attached less importance to such contracts and amended every franchise by making it exclusive and practically perpetual, although subject to termination by the acquisition of the physical property of the utility under eminent domain. The necessity of coining a new phrase to denominate a well-established legal right or privilege might have been thus avoided or, if deemed desirable, might have been employed without causing any anxiety on the part of those whose rights were being enlarged rather than curtailed by the amendment. No honest or intelligent opposition can ever be brought against carrying out in some satisfactory manner the economic purpose designed to be accomplished by the provisions of the law relating to franchises.

In considering the features of the law, herein before discussed, in their broader aspects it would appear that the unbiased mind must necessarily come to the conclusion that the system of state regulation and aid provided by the Public Utilities Law of this state is capable of producing eventually more permanent and satisfactory results than any system of local control that can be conceived. It recognizes that public utilities are business enterprises requiring a high character of scientific skill as well as business ability for their successful operation and management. Any public control which ignores this fact must of necessity fail. Local control, as commonly practiced, consists of nothing more nor less than spasmodic attacks upon rates and services of public utilities regardless of the physical conditions of their plants, their financial needs or possibilities. Because of local attacks public service corporations have not infrequently yielded to local pressure and reduced their charges for the sake of peace when public interest, if the situation had been properly understood, would have been best served by maintaining the revenues so as to have enabled them to make improvements by adopting new inventions

and thereby rendering better service at a permanently reduced cost. To compel a public utility to improvidently curtail expenditures of operation, neglect proper maintenance and improvements and make no provisions for depreciation will, in the end, result in an increased burden upon the public. The time will come when these omissions must be supplied and the public will be obliged to supply them or go without the service. To meet the requirements when they occur is the only economic method that can be adopted in the administration of a public utility. That public regulation which does not deal intelligently with the business interests as well as the physical property of a public service corporation will prove disastrous in the end.

FACTORS DETERMINING A REASONABLE CHARGE FOR PUBLIC UTILITY SERVICE

AN ADDRESS AT THE ANNUAL DINNER OF THE WESTERN SOCIETY OF ENGINEERS, HOTEL LA SALLE, CHICAGO, JANUARY 7, 1914

BY M. E. COOLEY, DEAN OF THE COLLEGE OF ENGINEERING, UNIVERSITY OF MICHIGAN

(From the Journal of the Western Society of Engineers, January, 1914)

Probably no question of greater importance confronts our people to-day than the relations of the public and the public service corporations. I refer to relations of a domestic character, rather than foreign, those which affect us as a nation considered as a family in which the interests of all of its members are, or should be, entwined, interwoven, in such manner that whatever is good for one is good for another.

Naturally in treating my subject I shall have in mind ideals which may require years for their realization, but I shall hope to appeal to you with arguments based so firmly on actual facts that I shall not be accused of being academic. I shall endeavor to throw upon my subject the light of nearly fifteen years of experience in the investigation of public utility properties, and I shall hope to leave with you the impression that my views have been expressed with due regard to proper perspective. That is to say, I shall hope to avoid being accused by any one of even appearing to favor one side of the question as against the other. My desire is to speak of what may be seen from the hilltop of any one who will divorce himself from the interests of either side, and try to look upon the problem with unbiased vision.

There are, of course, two sides to this question as there must be in order that any question can exist. There is the side of the public and the side of the public service corporation. To-day they are wide apart. They are wide apart for one principal reason, namely, ignorance. While it may be no disgrace to be ignorant, it is disgraceful to remain ignorant when so little education is required to dispel it. The education required is not difficult; indeed, it is very simple; but the trouble is that very many of those who most need it are not willing to be educated. Various motives exist, which I will not discuss here, further than to mention that chief among them is a spirit of antagonism, akin to revenge on the part of the public, in localities where the opportunity exists for its manifestation."

It is, I believe, generally considered by the officers of public service corporations that they are, or rather were, themselves responsible for the unfriendly attitude of the public toward them which is now almost general in this country. The public service corporation has in the past proceeded on the theory that the words public service had no particular meaning, and that like any other corporation it was at liberty, and indeed had the right, to make as much money as possible out of its business. The public service corporation has in the past ignored the fact that its right to do business is a public grant, a grant which in the very nature of it precluded others from engaging in the same business in the same locality. True, in theory, at least, others might be admitted to the field and thus create competition, but practically it has not worked out that way. Ordinarily there is not enough business for two, and even if there were, great inconvenience is likely to result; as for instance in the use of two telephone systems, two waterworks systems, and several street car systems in the same city. It is much to the advantage of the public, both in convenience and expense, to have a single utility of the different kinds serve it when that service can be had on fair terms.

What are fair terms? That is what is partly meant by the words reasonable charge in the title of this paper. I say partly meant. In the broad sense they may be synonymous. To illustrate: The service rendered by a public service corporation may be very poor without any good excuse for it. In such a case a reasonable charge would be less than when the service was entirely satisfactory. Careless or unintelligent management, or a desire to increase the dividend rate, would lead to this result. Again, the service rendered may be very poor and yet be the best possible and keep the business alive; that is, were the rates higher a better service could be rendered. This may be found in small towns where the extent of the business will not. support anything better. Further, the service may be very unsatisfactory and still be the best possible to render regardless of rates; that is, physical conditions may limit the ability to render satisfactory

service. This may be found in large cities, an example being a street railroad system which cannot be extended except by building elevated or underground systems.

Fair terms, then, means fair service, or the best possible under the conditions, to the public on the one hand, and a reasonable charge for that service to the corporation on the other hand. They are, or should be, the two members of an equation which are equal to each other. Like an equation, given the service demanded and certain other factors involved, the fair rate, or the reasonable charge, can be readily determined. It is these factors we come now to consider. They embrace, first, the capital investment upon which the interest return is made either in the form of interest or dividends, or both; second, the operating expenses which include maintenance and repairs of all the elements of the physical property, and taxes; third, a depreciation fund out of which can be replaced elements of the physical property which are worn out, or have become obsolete, so that they can no longer be used economically; and, fourth, a sinking fund to provide for the loss of capital due to depreciation, or the difference between the cost of the property when new and when disposed of at the expiration of its franchise life. Let us take them up in order, capital investment first.

It should be understood at the outset that no capital can be made available for a public utility, or for any other business, for that matter, without a sufficient return on the money to tempt its investment in the business. Capital obeys the law of supply and demand like any commodity. Thus, if capital be invited for investment in a service which is desired by the public, then the public must expect to pay the price in the form of interest or dividends which is necessary to secure it.

However much in the past capital may have been tempted into the field without invitation in the hope of large returns, those days are rapidly disappearing; and before very long, if not now, we shall be obliged, not only to extend an invitation, but to offer inducements to bring capital to our door. Those inducements must be not only a fair return on the capital investment but a welcome guaranteed throughout a term of years. Capital may be compared with the guest in our household. While she bides with us she is entitled to the treatment accorded to a guest. She may have worn out her welcome but at the same time have become indispensable to our domestic affairs, so that we must continue to suffer her presence. We, the public, cannot invite the guest and then while she is with us slap her face; on the other hand, the guest cannot with impunity proceed to rob us once she is in our home.

There is at present a very natural distrust on the part of the public. Capital in the past having very often been self-invited, and having