BUSINESS AND INDUSTRY

Municipal Ownership of Electric Light Plants

JAMES R. CRAVATH IN WORLD TO-DAY May 1 1907
BUSINESS AND INDUSTRY

Municipal Ownership of Electric Light Plants

JAMES R. CRAVATH IN WORLD TO-DAY May 1 1907

Municipal Ownership of Electric Light Plants

JAMES R. CRAVATH IN WORLD TO-DAY

This is a very timely article municipal ow er hip by the western editor of “The Electrical World.” his problem is confronting all business centes to-day so that an article giving the advantages and d sadvantages of music pal ownership should be very oppertune.

DOES it pay a city to go into the electric light business? Should it own its street lighting plant or should it let the contract to a private company? These are questions which have perplexed the voters in many towns. The average citizen who pays the taxes needs only to have the evidence on both sides laid fully before him to decide and vote in the way most favorable to his pocketbook. His difficulty usually is to get the evidence. On the one hand, if the most radical advocates of municipal ownership are to be believed, the electric lighting companies of the country are earning enormous profits, which under municipal ownership would stay with the taxpayers and consumers. On the other hand, according to some of those opposed to municipal ownership, such ownership has a record of dismal failures, mismanagement and graft. The majority of thoughtful citizens who belong to neither of these two radical classes are looking for the truth, which (as usual in such arguments) lies somewhere between the two extremes. I will aim to present in an unprejudiced way some of the essential facts on both sides, as observed during many years’ work and familiarity with the electric light and power industry of the country, both as carried on by cities and by private corporations.

In the case of a large number of the electric light plants owned by municipalities in the United States, the question of city versus private ownership was never an issue, for the reason that the towns are so small and the profits so uncertain that if the city did not build the plant no one else would. These we must evidently leave out of account in our discussion. What, then, are the objects sought by a city which establishes its own electric light plant if private capital has embarked, or is willing to embark in the enterprise ? Evidently

to save money for the taxpayers or to

get better service.

The common argument, of «course, for the establishment of a municipal plant is that the city will gain the profits which ordinarily go to a private company undertaking a street lighting contract. But what are the profits actually earned by electric light and power companies through the country ?

Whether an electric light plant is built by the city or by a company, interest should be paid on the investment. If we assume that a large part of the cost of construction is paid by issuing bonds, it is undoubtedlv true as claimed by municipal ownership advocates that a city can sell bonds bearing a lower rate of interest than could a private corporation doing the same business. It will be evident, however, that a difference of one or two per cent, in bond interest on a plant may easily be counterbalanced by other factors, such as the rate of wages paid and the efficiency of the management.

It is of first importance to determine in this connection the actual profits being made by electric light and power companies over and above the common rates of interest paid on municipal bonds. If such profits or dividends are considerably above interest rates on municipal bonds, we have at once a strong incentive for municipalities to enter into electric lighting business themselves. Otherwise one great argument for municipalization disappears.

Unfortunately there are no figures available on the financial condition of electric lighting companies the country over, and we must fall back upon our general knowledge of the business and the statistics of a few localities. The State of Massachusetts for twenty years past has had an excellent system of regulating electric light companies and municipal plants and safeguarding the interests of both stockholders and public.

Yearly reports are made to a board of gas and electric light commissioners, both by private companies and municipal plants. We have therefore from Massachusetts more complete information as to the state of the industry than from any other state or locality. We can place more confidence in the reports of this commission than in most of the other statistics cited in connection with municipal ownership controversies, for the reason that the methods of classifying accounts and making reports as well as the issuance of stock and bonds are controlled by the commission according to certain uniform regulations, and have been for many years. Companies and municipalities not required to report according to such fixed rules, if they issue reports of their financial conditions at all, issue them in such various shapes that no one but an expert can analyze them in a way to afford a true comparison, and frequently even an expert cannot make such comparison without actual further examination of the books.

In Massachusetts, according to the 1905 report of the commissioners, of the fifty-six purely electric light and power companies in the state, twentyfour paid no dividends ; one paid a dividend of two per cent ; one a dividend of four per cent. ; one a dividend of 4.5 per cent.; four a dividend of five per cent.; eleven a dividend of six per cent.; three a dividend of seven per cent.; eight a dividend of eight per cent.; one a dividend of nine per cent., and two paid dividends of ten per cent. In some states with some kinds of corporations these statistics on dividends would give little indication of the per cent, of earnings on the actual investment, because of the common practice of issuing watered stock for which but a small per cent, of the face value has been paid. In Massachusetts, however, where securities for many years past have been issued only upon approval of the commission, to pay for actual improvements in a plant, these figures can safely be accepted as indicating very nearly the true state of affairs. This statement as to dividends, of course, does not show what earnings may be put back into the property in the shape of

new construction and extensions. In this latter connection it is of interest to note that the combined balance sheets of the Massachusetts companies show a surplus of 10.76 per cent, on the entire capital stock, in the 1005 report, but this is less than the surplus showed the year previous.

These figures simply demonstrate what is known to every well-posted man in the business : namely, that electric light companies, when well managed and if in sufficiently large towns, can be reasonably expected to pay the usual prevailing rates of interest on investment, and in some cases a little more than that, but that there are plenty of companies which, either for the lack of good management or for some local reason, are earning practically nothing. There is certainly nothing in these figures to indicate that enormous profits are to be pocketed by taxpayers as a result of a municipal electric light plant.

But are the street lighting rates in the Massachusetts cities served by private companies the same as those where there are municipally-owned plants ? Consulting the Massachusetts report further to determine this point, we find that the rates per year for arc lamps commonly rated as 1,200 c.p. are from $104, the highest rate to $54.69, the lowest. In municipal plants the cost of such lamps is given as from $133, the highest, to $53.34, the lowest. In the Massachusetts figures, of course, interest on the investment is included, as it should be in all such reports. Taken altogether, the cost of street lighting by municipal plants in Massachusetts is not strikingly different from that in cities supplied by private companies, although the highest municipal figures are considerably above the highest contract figures.

The reason that these Massachusetts figures on costs of municipal lights do not correspond with some which wre see quoted by radical municipal ownership advocates on plants in other states is that in Massachusetts the law requires that an allowance of five per cent of the cost of the plant shall be made yearly for depreciation. This allowance is certainly none too much, and in some cases is too little, but it is frequently

left out of account altogether in figuring the cost of municipal lighting on a plant owned by a city.

Another set of statistics which throw some light on the amount of profit in electric lighting business in general is obtainable from a report made by the secretary of the Iowa Electrical Association to that body in 1906. The secretary obtained reports from seventyseven electric light companies in that state. The average dividend was 2.95 per cent.

New York State also has had for a short time a gas and electric light commission under laws similar to those in Massachusetts. The returns made indicate in general a very similar condition of affairs to that in Massachusetts. On the whole, from my knowledge of the business the country over, I think the Massachusetts figures would correspond closely to those in the majority of other states, were the figures known, except that a very limited number of companies may temporarily earn a little better than ten per cent.

I have so far considered this question of financial returns only in a general way, without taking up any specific examples. For those who wish to study such specific examples the published reports of the Massachusetts and New York commissions are open. As the former reports are made on uniform systems of accounting, comparisons can fairly be made between the different companies and municipalities reporting. Specific examples from other states have been cited many times in municipal ownership controversies, but because of the great differences in methods of accounting, as before explained, they are likely to be almost worthless for purposes of comparison unless scrutinized closely by experts.

One of the most prominent examples of a municipally-owned electric light plant is that of Chicago, about which there has been considerable controversy. Chicago’s municipal electric light plant, unlike many others, was not built by the sale of bonds, but has been paid for a little at a time out of the general tax levy as the plant has been gradually enlarged. According to the last published report of the city electrician, in which

interest on the money was figured in both cases, there has been a saving to the city of something like ten per cent, in the total cost of street lighting for the entire period of eighteen years the city plant has been in operation. This statement, however, assumes that the cost per lamp under a private contract would have been the same as the city has been paying a company for a few rented lamps in widely scattered outlying districts where the city could not operate as cheaply. As to whether Chicago would have had to pay for a large number of electric street lamps as much as it has been paying for a comparatively small number of scattered lamps on short and uncertain contracts, is, of course, problematical.

According to ITaskins & Sells, expert accountants, who went through the Chicago lighting accounts about six years ago, the operating cost of a municipal 450-watt arc lamp in the city of Chicago in the year 1900 was $62.09 ; and the total cost, including water, insurance, taxes, depreciation and interest charges was $99.08. Allowing for certain items, over which there may be controversy, it is safe to say that the cost per lamp was over $90, including fixed charges, which is not far from the average paid in other great cities. The rate paid for similar lamps in New York City is $100, but coal and distribution investments are higher in New York.

Chicago has what might be rated as one of the relatively successful municipal plants. Among the decidedly unsuccessful ones, a conspicuous example was that at Muncie, Indiana. This city had a municipal street lighting plant which cost $36,000. In eleven years, under council committee management (or lack of it), the operating cost per lamp nearly doubled. The superintendent, in his annual report, made before the final demise of the enterprise, recommended that if the city could not find the money with which to improve the plant, it had better sell to private parties, or buy current from some private company. The matter was brought to a head by the bursting of a fly-wheel in the; municipal plant and the wrecking of the station. A ten-year contract was then

made with the electric light company to supply street lamps at a cost far below the operating cost shown by the yearly reports of the municipal plant. The municipal plant, upon which $36,1)1)0 had been expended in construction, was valued by a board of appraisers at $15,000, or a depreciation of $21,000, with no fund to provide for it.

I might go on and cite numerous cases of disastrous municipal electric light plant ventures and I might also cite some cases of well managed and successful municipal plants.

It a proper depreciation account is not kept and a municipal plant is not insured for its actual value, it is the whole body of taxpayers who suffer when the plant is destroyed by accident. When a company gives poor service or charges high rates, the public at large will be much more benefited by taking measures to secure adequate control of the offending company than they will by trying to take over the business of the company, the difficulty of whose operation is not known.

In the case of both private and municipal plants, the margin of profit is small enough for good or bad management to throw' the balance one way or the other. But with this difference : If the private plant is mismanaged it is no concern of the taxpayer ; it concerns only stockholders. Under a contract with a private company for street lighting at a reasonably low rate, the taxpayer takes no risk save a possibility of paying a small percentage more for given services than he would pay if the city ran the plant. If the city owns the plant, he may get his street lighting for a little less than he would pay the private company, but with the tolerable certainty that if there is grafting or incompetency in the management of the plant, he will pay a good deal more. In fact, it is a kind of one-sided speculation except, of course, where reasonable rates cannot be obtained from a private company. The taxpayers of a city usually, therefore, should think several times before embarking in such enterprises.

As the management of municipal electric light plants is such an important ?actor in determining whether it is a

losing proposition or not, let us inquire into the possibilities for good or bad management in connection with it. I am not one of those who believe that municipal management is necessarily and invariably incompetent. This is disproved by a number of cases where municipal enterprises were well managed. But there are certain things in American municipal affairs to which we can not shut our eyes, however we may hope to change them within the next twenty-five years. The war against graft in municipal politics, has been making considerable headway the past ten years, and we may hope to see it make even better headway the coming ten years ; nevertheless graft :is a factor to be considered.

The fact is that, at the present time it is as a rule difficult to get the best class of men for the management of municipal enterprises. Why ? In the first place, a man of ability and ambition will usually prefer to work for a private corporation, where opportunities for advancement and appreciation of ability arc better than in municipal service, and where he is more certain of his position. The man working for a municipality is altogether uncertain as to his future or as to the competency or incompetency of the council committees to which he may be responsible. As he is working for the public, he is subject to all sorts of criticisms to which an officer in a private corporation is not subject, and may even be suspected of grafting because he is a city employee and for no other reason. These things, no doubt, account for the fact that comparatively few men of promise in the electric lighting industry of the country are to be found in municipal plants. In my personal experience on the editorial staff of a paper devoted to the electric lighting industry and in traveling among such plants, I almost invariably find that the up-to-date, progressive and aggressive management which contributes to the general progress of the art is to be found in private rather than municipal plants.

The advocates of municipal ownership have laid considerable stress on the possibility for corruption of city coun-

cils and other officers in connection with the letting of the street lighting contracts or franchises to private companies. That there are such possibilities, especially in the larger cities, no one will deny. On the other hand, it is not likely that a city government composed of rascals would find even more opportunity for robbing the taxpayer under municipal ownership ? In the case of a private contract the amount is definitely known to everyone at the time the contract is made, and if there is anything unreasonable about the proposition, public sentiment will enforce reasonable terms before the contract is signed. When the public utility is municipally owned, it is a difficult matter to locate and prevent graft both large and small.

Space is not available here to cite specific examples of successful and unsuccessful municipal plants at any length, but I may mention a few of the extremes. One of the most successful municipal plants I know of is that at Marquette, Michigan, where the city developed a water power. The property is managed much like that of a private company. Considerable power load is carried. So enterprising lias been the management that the gross earnings from the operation, according to the annual reports, are as high as $4.20 per capita of population. Most private companies are not doing as well as to gross earnings. The lighting department of the city is kept separate from all others, just as if it were a company, and it is paid $75 per year for a 2,000c.p. arc lamp. For the balance of the revenue the management of the plant is dependent on its own enterprise. Chicago’s plant is mentioned elsewhere. Detroit’s municipal plant may also be rated among the more successful. While lamp costs in Chicago and Detroit are nowhere near as low as advertised by municipal ownership advocates in years

past, they are not far from prevailing contract rates.

Among recent municipal ownership failures may be enumerated Muncie, Indiana, mentioned elsewhere, plant abandoned, and bonds not paid off ; La Grange, Illinois, plant sold to a company ; Elgin, Illinois, municipal costs so high that contract was let to a company ; Jonesboro, Indiana, plant turned over to bondholders ; Alexandria, Virginia, plant leased to a company for thirty years ; Ashtabula, Ohio, $88,000 plant depreciated $50,000 in fourteen years, advertised for sale ; Brunswick, Missouri, plant sold for thirty-five cents on the dollar, city taking pay in light and water ; Casselton, North Dakota, plant sold for two-fifths cost ; Siloam Springs, Arkansas, $30,000 plant leased for $600 per year ; Peru, Indiana, council investigating committee found arc lamps cost $207 per year and advised that the city abandon the business and sell the plant ; Linton, Indiana, plant leased for five years ; Hamilton, Ohio, gas plant shut down and state examiner reported deplorable financial conditions and abnormal costs due to faulty construction in electric light plant ; Bloomington, Illinois, increase from $58 to $65 in yearly cost of arc lamps in ten years, although cost should have been less ; Easton, Pennsylvania, mayor favors letting of private contract if city cannot maintain better service, and business men petition for such a contract ; Lakewood, Ohio, expert accountant found cost of arc lamps about double the price offered by a private company.

What conditions will be twenty-five years from now, I do not know, but I hope and believe that they will be more favorable for municipal enterprises. In the meantime I am willing to let the private corporations take the risks and the profits wherever they can and will give reasonable rates and good service.