i ^H 7915 G22 i-;r^-'^''i^:;' pUU (folbgc of ^^grtcultttte 3tlfara, N. H. Ilibratg TH7915.G2T" ""'"""' '-""">' The making of rates and the "additional 3 1924 003 632 290 Cornell University Library The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924003632290 THE MAKING OF RATES AND THE "ADDITIONAL BUSINESS" SYSTEM OF COSTS BY W. H. GARDINER, JR. OF BOSTON PRESENTED AT THE TWENTY-NINTH ANNUAL MEETING OF THE WESTERN GAS ASSOCIATION. CLEVELAND, O.. MAY, 1906 BOSTON PRESS OF GEO. H. ELUS CO.. 272 CONGRESS STREET 1906 @^§-?// CONTENTS. PART I, Introduction PART II. Quantitative Analysis of Consumption 9 Analysis of Sales by Meter to Ciistomers , . .... Chart I. 9 PART III. Present Recognized Rates 11 DohertyRate 11 Wright Demand System 13 Two Rate Meters 16 Different Rates for Light, Heat, and Power 16 Quantity Increment System 18 Minimum Meter Charges 20 Uniform Rates by Meter 20 Fixed Pa3mient Rates 22 Comparison of the above Rates 22 PART IV. Cost Analysis 24 Assets and Liabilities Table I. 24 Income to Assets Table II. 25 Load Factors 25 Physical Data Table III. 26 Physical and Financial Relations Table IV. 26 Distribution of Assets and Sales Capacity Table V. 27 Load Curve and Sectional Sales Chart II. 27 Massachusetts Standard Operating Statement .... Table VI. 30 Operating Statement with Assets and Charges Ap- portioned to Each Department . . Table VII. & Table VIII. 31 Analjrtical and Differential Cost Finding 35 4 FAGB PART lY.— Continued. Explanation of Major Anal3rtical Accounts 35 Definition of Major Analytical Accounts Table IX. 36 Analysis of Operating Expenses Table X. 38 Analysis of Fixed Charges . . Table XI. 40 Summary of Amounts of Expenses and Charges as Analyzed Table XII. 41 Distribution of Expenses and Charges as Analyzed . . Table XIII. 42 Items of Cost per Unit Table XIV 43 Items of Rate Charge Deduced from Analysis .... Table XV. 44 Amounts of Costs and Rate Distribution thereof . . . Table XVI. 45 Amounts and Origins of Joint Costs Table XVII. 46 Accumulated Investments and Costs of Additional Equipment ... 46 Conclusion of "Additional Business" Analysis 47 PARTj V. Contrast of Results Obtainable from "Amounts and Averages" AND FROM "Additional Business "Systems 48 Comparative Data of Each System Table XVIII. 48 Results of 20% Increase in Sales from "Amounts and Averages" System Table XIX. 50 Results of 60% Increase in Sales from "Additional Business" System Table XX. 52 Net Earnings from "Additional Business" Sjrstem . . Table XXL 53 Comparison of Net Results Table XXII. 54 PART VI. Principles of Rate Construction 56 Data from Analysis of Costs Table XXIII. 56 Individually Apportionable Costs 56 "Joint Costs" as "Reserve" and "General" 57 "Reserve Capacity" 57 I Various Methods to meet " Joint Costs " 59 ■ Endeavor to make Rates Individually coincide with Costs 59 Arbitrary but Uniform Apportionment of "Joint Costs" in "Specific Costs" Table XXIV. 60 Resultant Items of Charge Table XXV. 60 Charging only on the Basis of "Worth" 61 "Charging What the TraflSc will bear" 61 The Average Price the Only Price of Real Interest to the Whole Com- munity 62 PART Yl.— Continued. "Not Charging What the Traffic will not bear" 62 "Worth,"not"Ck)st," the Basis of "Price" 62 Postal Rates .... 63 Municipal Taxation 64 Income and Inheritance Taxes 64 Toll Road Charges (Adam Smith) 65 Railroad Rates 65 Classes of Freight 65 Comparison of American and German Results . . . Table XXVI. 66 Application to Lighting Rates 68 Economic Desirability vs. Sociological Expediency 69 Individual Costs Individually Met 69 Impossibility of Apportioning "Joint Costs" on the Basis of "Indi- vidual Costs" 69 " Joint Costs " Placed where the Value of the Service is Greatest ... 69 Analysis of "Cost" and "Worth" 70 Government Regulation .... ... 70 Wright Demand and Doherty Rates 71 Equity Superior to Uniform Rates by Meter 71 PART VII. Conclusion 73 Communal Charges 73 Ends Sought 73 Items for Discussion 74 THE MAKING OF RATES AND THE "ADDITIONAL BUSINESS" SYSTEM OF COSTS PART I. INTRODUCTION. The author's purpose in this paper on the intricate and vital sub- ject of Costs and Rates is not to advocate or advance any special system of rate making or charging for gas, nor, in such analyses as occur herein, to define, specify, or limit any particular item of cost or charge, but rather to consider entirely empirically what appeal to him as some of the fimdamental functions or factors of the problem. At the outset it might be well to define his belief as a corporation man regarding the general attitude and relations which should exist between a public service corporation and the community it serves. When a corporation accepts an exclusive franchise, — and all fran- chises should, for the benefit of the commimity, be exclusive, — ^it takes on the exclusive duty of supplying the community it serves with its especial commodity. This involves the moral obligation on the part of the company to so govern itself as to supply its commo- dity as fuUy as is conmiercially practicable; that is, to saturate its territory, and that it should do so is for the benefit of the community, because it will not make what we now call excess sales over and above the automatic demands of the community unless these sales are made in successful competition with other commodities, as oil, coal, etc., and therefore on terms more advantageous to the commiinity or below such terms as might pertain for the aforesaid competitive commodities. With this attitude on the part of the public service corporation the community served owes to itself and for its own benefit the obliga- tion to allow the corporation to so regulate affairs as to bring about this commercial saturation of the territory. It further owes to the 8 corporation the right to make a fair return in the conduct of its busi- ness, not only in proportion to the actual monies invested, as pro- vided by the Fourteenth Amendment to the Constitution of the United States, but also as a consideration for the serious business risks of capital involved in developing the business and for the great busiaess and managerial abihty necessary to this development, the direct benefits of which accrue to the advantage of the community. Net earnings, over and above the primary and necessary interest on capital, should be and are but a just return from the community to the corporation for the great benefits it bestows upon the community in money saved the community at great risk and labor to the corpora- tion. With this in mind, it becomes of paramount importance that all statements of cost determination and rate making should be such as wiU, to the utmost extent commercially possible, develop the business of the corporation for the joint and equal good of the com- munity and the corporation, who are, in fact, co-partners in the imdertaking. To this end the author has given special attention to the means for developing the gas business. In this connection it has occurred to him that the principal points deserving of study are those costs at which additional business can be taken on. However, before taking up in detail the question of Costs, the author desires to review certain gas and electric rates which have been more or less broadly used and which are characteristic of the different lines of thought hitherto formulated on this important problem. PART II. QUANTITATIVE ANALYSIS OF CONSUMPTION. One of the foiindation stones of the rate problem is the question of how gas is taken quantitatively by each of all the customers of a gas company. As a statement of this, the author presents the following diagram, which is very similar to that presented by Mr. Frank W. Frueauif, in his paper before the American Gas Light Association in MO to iO 30 40 SO SO 70 SO SO ~gO 30 40 SO 60 70 SO Cunju/ofiVe ^rveyjfef Tdfo/SoAts /f 0//e Year: CHART I. 10 Washington, October, 1904. Here are shown the quantitative anal- yses of the accounts of seven companies, aggregating over one hundred thousand customers. The vertical column shows the cumulative per cent, of accoimts up to 100% ; the horizontal coliman shows the cumulative per cent, of total sales up to 100%. Therefore, to read the table, one has but to, as an example, ask, "What are the actual or relative sales, under one or more conditions, made to 50% of the smaller customers?" Fol- lowing the horizontal line starting at 50% of the number of custo- mers, it would be seen that this line intersects all of the groups at various distances from zero per cent, of sales. Following down from each one of these points of intersection, the per cent, of the sales made to 50% of the smaller customers in each company can be read directly. This diagram makes clear the fact that within broad limits quan- titative methods of consiunption are generally similar. However, there is, as above illustrated, sufficient divergence, as between Com- panies, to, in the opinion of the author, warrant making similar analy- ses of the accounts of any company before any special differential rate action is there taken. PART III. PRESENT RECOGNIZED RATES. Turning now to the direct consideration of certain rate systems, the author would consider these not in their historical or chronological sequence, nor from the simpler rates progressively up to the more elaborate ones, but rather in the reverse order, as the more elaborate or more highly developed rates embody certain principles, a clear understanding of which is necessary to an insight iato the fallacies of the more rudimentary rates. Also, in order to make the discus- sion more tangible in form, he will, in various rates, assign certain arbitrary money considerations, which are not intended to be specifi- cally accurate, but are used merely as illustrations. Doherty Rate. This rate was first presented by its inventor, Mr. H. L. Doherty, before the National Electric Light Association in 1900, in his paper "Uniform, Equitable, and Competitive Rates," and the gas modifi- cation of the rate was presented by Mr. Frank W. Frueauff before the American Gas Light Association in 1904. Its form is : A Customer Charge of say $12 per customer per annum. A Demand Charge of say $30 per annum per one hundred cubic feet demanded per hour per customer individually apportioned. The Customer Charge and Demand Charge are assessed in twelve equal monthly pajonents. A Consumption Charge directly proportional to the actual takings of gas at say 70c. net per thousand cubic feet. This rate is, in the opinion of the author, the most equitable one as yet advanced. In so far as possible, it seeks to, with scrupulous care, assess payment where cost is incurred. 12 The Customer Charge is caused by the expenses and other costs incidental to carrying an account. The Demand Charge originates in the expenses and charges for capacity equipment caused by the maximum momentary demand of each individual customer in relation to the maximum momentary aggregate demand of all customers. The Consumption Charge is that basic cost at which gas can be sold in a given situation when it is freed from the costs met by the aggre- gates of the Customer Charge and the Demand Charge. The effects of this rate are to charge an extremely high maximimi price per miit of sales to the customers whose consumption is extremely small or whose maximum demand is very large in proportion to the aniount of gas they burn. And this because they individually cause Costs proportional to these high Charges. From these very high initial prices per xinit of sales the average price per unit of sales for each customer drops very rapidly as the volume of his consumption increases or as he consumes more gas in proportion to his maximum rate of taking; that is, as he becomes what is known as a "wholesale customer" or a "long hour burning customer." This drop is carried out on a curve which is asymptotic to the base line of say 70c. per thousand cubic feet. The result of this is that the customers who, on account of the way they take service, cost the company a great deal to serve, pay in proportion thereto. Whole- sale or long hour burning customers, who cost the company very much less to serve per unit of sales, pay likewise in proportion to the costs they impose upon the company. The effect of this is that, because of the charges assessed upon cus- tomers imposing a large cost per unit of sales, proportional discounts can with equity and profit be made to the customers imposing com- paratively small costs per unit of sales. The high initial prices are in no way ineqtiitable because they are simikr to the costs producing them, and are not prohibitive because in no field or use is gas or elec- tricity from a pubUc service corporation a real economic monopoly except in means of serAdce. But most important of all, by this equi- table apportionment of prices to costs, the company is enabled to serve its wholesale or long hour burning customers at prices very much below the average price per imit of sales. Thereby business is obtain- able and service can be rendered a large proportion of the community, 13 taking perhaps the larger part of the total business of the community, to an extent which would be absolutely impossible were the mini- mum price per imit of sales also the average and maximum price, as in the uniform rate by meter schedule charging simply so much per thousand. Also from the constant monthly occurrence of a fixed assessment of Customer Charges and Demand Charges, together with a variable Consumption Charge, a customer's bills in Summer are larger in proportion to his consumption than in Winter; that is, the bin ciu^e does not fluctuate as violently as the constimption curve. This is of material assistance to the Complaint Department, the ac- tivity of which Department is, in most Companies, proportional to the hours of darkness in each month. The main results effected by the Doherty Rate are assessment of charges where costs originate; lowering of the average price by in- creasing the consumption through sales unobtainable excepting at prices below the average price; stimulation of long hour burning con- sumption; penalizing short hour burning consumption; penalizing any tendency to elevate the peak without proportionate consumption; increasing the divisor of fixed expenses and charges. This results in a higher saturation of territory, larger gross and net incomes and lower average prices. Wright Demand System. This system was evolved by Mr. Arthur Wright, of England, about 1895, and, in the author's opinion, is that system which comes next in equity to Mr. Doherty's. In its simplest form, it is as follows : Charge say 20c. per K.W. Hour for Primary Consumption. Charge say 10c. per K.W. Hour for Secondary Consumption. The amovmt of primary consumption or current to be primarily consumed during the year may be that quantity required to light one fifty watt lamp four hundred hours in the year, multiplied by the maximum momentary demand in current as determined by the max- imum number of lamps lighted by each customer at any one time. Instead of assessing or apportioning the demand charge included in the higher rate for primary current as determined by the four himdred hours of burning throughout the twelve months at the rate of 33^ hours 14 per month, as does Mr. Doherty's Customer Charge and Demand Charge, the following statement of monthly apportionments is some- times used: Minimum Houhs of Buhning per Lamp of Maximum Demand. Januaxy 50 hoxirs July . . . February 40 " August March 30 " September April. ... . 30 " October May ... ... 20 " November June 20 " December 190 hours Total, 400 hours. 20 hours- 20 30 40 50 50 210 hours It may be inferred that this monthly apportionment of primary current causes the year's bill curve to follow the consumption curve more closely than tinder the Doherty rate, which action is open to discussion. One end sought by this apportionment of primary hours is that the secondary follow each month the primary as nearly as may be under natural conditions as determined by the hours of dark- ness in each month, but another object is that the customer may reach his secondary or lower rate as quickly as possible in summer, and thereby be induced to greater summer use. An analysis of the Wright Demand System shows that it embodies most of the fimctions of the Doherty Rate and can best be under- stood in terms of the Doherty Rate. Assume 20c. per K.W. Hour as the rate for primary consumption, — 10c. per K.W. Hour as the rate for secondary consumption, — 400 K.W. Hours per annum per K.W. of Maximum Demand as the quan- tity of guaranteed primary consiunption. A minimtmi bill of one dollar per month is supposed to take the place of the Doherty Customer Charge of one dollar per month. This- is a minor and comparatively unimportant difference. The basic price for current would be 10c. per K.W. Hour. The Demand Charge would be 20c. — 10c. or 10c. per K.W. Hour times 400 hours per aimum = $40 per annum per K.W. of Maxi- mum Demand. The demand function is here practically as in the Doherty rate^ 15 The principal difference is that instead of charging for Demand Costs as a separate item, as is done in the Doherty rate, the Wright Demand system disguises them in a primary charge for cm-rent at say twice the base rate. But, in order to justify this initial rate of twice the base rate, its excess over the base rate must be explained as having nothing to do with the Output Cost of current and as being caused solely by the Demand Costs. The author is not aware that this system has ever been used in the sale of gas. Its appMcation thereto would, however, involve no more than has the application of the Doherty rate to the sale of gas. By this system a rate schedule is presented to the customer which has aU the appearances of a Quantity Increment System or Step Schedule, but in which, however, the discountLug is conducted pri- marily upon the ratio of hom-s of burning to maximum demand in- stead of entirely on the wholesaling fimction. In the opinion of the author, Mr. Wright's system falls short of Mr. Doherty's in that his maximum price is limited by the minimum bin of $1 per month and the maximum price of 20c. per K.W. Hour unless the primary consumption is guaranteed. Consequently, he does not assess proper charges to his most expensive small customers, and therefore cannot go as low to his least expensive customers, nor does his rate decline as rapidly. This is very clearly set forth by Mr. Doherty in his paper on "Uniform, Equitable, and Competitive Rates," and was impUed by an eminent American advocate of the Wright Demand System, who said, in effect, that some K.W. Hours cost over one doUar to make, while others cost half a cent; and there is more profit in selling the latter at 2^ cents than the former at 20 cents. Mr. Wright's system, in the opinion of the author, is superior to Mr. Doherty's in its form of biU rendering to the customer. This is simply, — a stated maximum demand, so many primary K.W. Hours at so much and so many Secondary K.W. Hours at, say, fifty per cent. off. But it is inferior to Mr, Doherty's in that the customer cannot really understand his bill miless it is reasoned out with him practically in the terms of the Doherty Rate. It would also seem to be superior to Mr. Doherty's rate in that it appears to have that intangible quality which the author is forced to term "Commercial Flexibility," although this latter may be due 16 solely to the fact that it has been in use about twice as long as Mr. Doherty's rate, and therefore may be more highly developed in detail. As an example of this high degree of development in detail, the following modification of the Wright Demand System is interesting ; Maximum Demand X Primary Hours = Primary Current Primary Current @ 20c. per K.W. Hour Secondary " @ 6c. " " " " (70% off) In addition to the discount above given on all Secondary Current (or current in excess of the primary) a money discount is allowed from the bill stated as above for any one month. This discount might be 30% off of the excess of the consumption bill over $200; 40% off of the excess over $400; 50% off of all excess over $600 of the con- simaption bill. This wotild make the net basic price of current 3c. per K.W. Hour as the Secondary rate is stated at 6c., although, of course, the average rate of every customer would be more or less above the base rate. Two Rate Meters. The two rate meter system or Kapp System has been used both in electricity and gas, its basic principle being to charge, say, a list price of 20c. per K.W. Hour or $1.25 per thousand cubic feet during the hours of maximum demand and a lesser rate during the balance of the day, the endeavor being to penalize consumption or peak building during the peak hours and premiumizing consumption during the hoiu-s of light load. Specific Use or Different Rates for Light, Heat, and Power. This is a system finding abundant justification in the Government postal rates, Railroad freight and passenger rates and other forms of public service. Apart from the factors of long-hour-burning and imi- formity of load, its real reason is that, while say the Ughting business is worth and can be held at one rate, say $1.25 per thousand cubic feet, the heating business carmot be obtained, broadly speaking, at $1.25, but may be obtained within limits and held at, say, one dollar; likewise, the power business may not be obtainable at $1, but may be 17 obtained at 75c. When analyzed, from a gas and electric point of view, these differentials do not find ample justification because their range is frequently wider than the range in actual costs. From the electrical point of view, the essential reason why current for heat and power may be sold cheaper than for light is, first, that the voltage regulation reqmred is not as close as for light; second, that high voltages may be used, consequently the investment of distributing system necessary to carry a given wattage is less; third, the load in the aggregate may average to come at hours non-coiacident with the peak; fourth, customers may average to be comparatively wholesale customers rather than retail, as are most Ughting customers. If gas is distributed through the same mains for Ught, heat, and power, the only differences in cost are that the gas for heat and power is used more in a wholesale way and its consumption may average to be at times non-coiacident with the peak. When separate mains are used, and essenti-ally non-luminous high calorific gas is distributed, economies in wasted illuminating value practically useless for heat and power, may be effected. Also the fuel and power gas may be distributed at much higher pressures, requiring, therefore, mains of less size, and pressure regulation within very narrow limits is not as essential. It may be brought to miad in this connection that a higher press- ure for fuel purposes inures to the advantage of the customer, as it increases the efficiency of combustion. This same appUes also to all incandescent gas Kghting. It is a fact, of which most customers and legislative bodies are ignorant, that a high gas pressure, through in- creased efficiency of combustion, makes for a lower cost of incandes- cent hghting per candle power hour to the customer, in. fact, the author is cognizant of a number of instances in which the customers, at their own expense, have installed isolated machines for the sole pui'pose of raising the pressure of the gas as taken from the street mams to a considerably higher pressure, this high pre.ssure gas being used in incandescent gas hghting and heating. As one might expect, the cry of the pubhc against high pressures and for lower pressures is simply another instance of the public not knowing where lies its own advantage. 18 Quantity Increment System or Step Schedule and Block Schedule. Under these two schedules the only cost factor apparently con- sidered is what is known as the wholesaling function or that reduction in the average cost per unit sold to a given customer proportional to his burning more or less gas. In other words, the apportionment of only the fixed Customer Cost among more or less units of con- sumption. The Step Schedule may be illustrated as follows : — The first ten thousand feet at one dollar per thousand; if more than ten thousand and less than fifty thousand feet are burned in any one month by any one customer, the rate for that month to that customer shall be ninety cents per thousand on the whole. If over fifty thou- sand cubic feet are burned by any one customer in any one month, the rate for the whole to that customer for that month shall be say eighty cents per thousand cubic feet. This is essentially wrong, because a customer burning nine thou- sand five hundred cubic feet would pay nine dollars and fifty cents for it; but, if he burned ten thousand one hundred cubic feet, he would pay at the rate of ninety cents for it or only nine dollars and nine cents. In other words, he would get six hundred cubic feet over and above his first ninety-five hundred at less than no cost to himself, — in fact, at a premium of forty-one cents. The author knows, in fact, of a case where the first ten thousand cubic feet were paid for at the rate of one dollar per thousand; but, if over ten thousand feet were burned in any one month, the rate on the whole was sixty cents. The result was that actually the cus- tomer burned what he needed, let us say eight thousand feet, and then passed twenty-one hundred feet through a hose out of the win- dow, so as to get the whole for six dollars and six cents instead of eight dollars. The Block Schedule o})viates this by selling only each additional increment or block of gas at discounted rates, the initial or preceding blocks being sold always at their stated rates. Thus the first ten thousand cubic feet at one dollar; second ten thousand cubic feet at ninety cents; aU in excess of this first twentj^ thousand cubic feet at eighty cents. It is evident that this obviates the fundamental fallacy of the Step 19 Schedule. It is also evident from analytical figures that the appor- tionment of only the fixed Customer Expenses among more or less units of consumption (say ten thousand cubic feet in a month or one hundred thousand cubic feet in a month) would not cause the average cost and price of this gas to drop from one dollar to, say, seventy- five cents, if the Customer Cost were, say, one dollar or less per month. These schedules must, therefore, mvolve some other principle than having the price curve foUow the cost curve when the latter is varied solely under the influence of the relation of the variable consumption to the fixed individual Customer Cost. As a matter of fact, it would seem that the average rate taken, say for fifty thousand cubic feet or one hundred thousand cubic feet, is that rate "which it is fair to charge a customer of that magnitude." In plain English, this may mean charging him what you can, but not so much that you won't get his business. There is, however, another function entering into it. This is that very frequently, in fact usually, wholesale customers are, compara- tively speaking, long hour burning customers because they are usu- ally industrial customers. Of coiu-se a very large monthly con- sumption may occm-, for instance, in a shop burning gas for only, say, an average of half an hour per working day and only in the winter months. This would be a short hour burning customer. Nevertheless, it is, in the opinion of the author, a fact that, unbe- known to most advocates of the Quantity Increment System, the Demand Function enters into it, and causes the cost differentiation conjointly with the fixed Customer Cost Function, because most customers getting considerable discounts are long hour burning cus- tomers. The Quantity Increment System, however, falls do\\'n absolutely when it comes to penalizing extremely short hour burning customers with high maximum demands. Therefore, in part, its range of differentiation cannot be nearly as wide, nor is it, in fact, as rapid as those given by some of the rate systems previously outlined. Consequently it cannot be compared with them as a business getter. Furthermore, as its price curve bears but a very remote and in- tangible relation to any cost curve, it has but slight grounds of indi- vidual equity when compared with these other rate systems. 20 Minimum Meter Charges. Minimum bills or specific meter charges are simply an endeavor to meet, at least in part, actual Customer Costs. In so far as they ac- complish this, they are to be commended as approximating the prin- ciple of putting charges where costs originate. They lighten output or general costs by an amount equal to the extent to which they meet the Customer Costs, and are therefore in effect an approximation, even though crude, of some of the principles outlined in the Doherty Rate. Where meter charges are varied with the size of the meter, there may also be introduced some slight consideration of the demand function, but in practice this is made to apply only, perhaps, to the meters and service pipes. This slight consideration of the Demand Fimction is therefore more by a happy coincidence than by any intent. Uniform Rate by Meter. This system of charging for gas — say one dollar per thousand cubic feet regardless of any other consideration — ^is familiar to every one, and has to commend it merely its simplicity, the ease with which the public can understand it, and the minimum difficulty of accounting which it entails. It is, however, in the opinion of the author, one of the most unjust, inequitable, and undesirable systems, both from the view-point of the public and that of the corporation, that has ever been in use. It is hard to see what functions, if any, of cost making the uniform rate by meter takes into consideration. It takes no cognizance of Cus- tomer Costs, Demand Costs, Reserve Costs, General Costs, "Joint," Costs, or any other Costs excepting, apparently, an entirely unsound Output Cost into which is lumped everything else on the simple but misleading principle of "Amounts and Averages." It makes no attempt to have charges foUow real costs or values to any extent ex- cepting Output Costs; and as these are, in many instances, a minority of the total real costs, the system is proportionately unsound and un- justifiable. It would seem that the dominant desire merely for simplicity which prompted this rate (unless, perhaps, its originators were simple enough 21 to consider that the cost was proportional solely to output) has im- posed upon the gas consuming community a condition which works to their direct disadvantage to a degree which it would be hard to exceed. As an illustration thereof, where the costs of a certain com- pany operating under this system were analyzed, it was found that about one-half of the customers did not average among them to pay one-half of even the operating expenses which they caused. It was also found that capital charges on the entire equipment were made solely by income derived from less than one-third of the customers, and that less than one-sixth of the customers paid individually such profits over and above the costs and charges which they caused that they alone supported the great majority who fell short of paying the bare costs they entailed. Of course, this fifteen per cent, of profitable customers, who carried the deficits of almost everybody else on their shoulders, were the wholesale or long hour burning customers, most entitled to fair treat- ment through low rates because they imposed low costs per unit of sales. This condition in itself would seem to the author to be nothing short of disgraceful, embodying, as it does, the most highly developed form of automatic rate discrimination against those most entitled to fair consideration. Further analyses were made to see what could be done, if it were possible, to remove certain burdens caused by the improfitable class of customers. It was foimd that, without taking any fui'ther steps, discounts could be made to others to such an extent as to seem alto- gether improbable. Furthermore, it was found that if the improfit- able customers could be readjusted or developed into customers pay- ing their proportion of total costs and charges, still further discounts could be made to such an extent as to put the business on an entirely new basis which would be nothing short of revolutionary in the bene- fits it would confer upon the community. In the ultimate analysis, therefore, the uniform rate by meter can justify its existence solely on the facts that it does exist, and because it is simple and easily grasped by the pubUc. As suggested before, it would be hard to conceive of a system more detrimental to the best interests of the comnmnity at large, and this, among other reasons, is because it directly and persistently works 22 against the more extensive use of gas or electricity under conditions advantageous to the community. Another and perhaps the main and most important reason for the existence of the "Uniform Rate by Meter" is that the pubUc want H and that gas men have not generally taken the steps necessary to enlighten the public as to its best interests in the matter. Here is simply another instance where the public, through, on its part, blame- less ignorance of the essential details of a very complex business, may continue to insist on that which is least to its own advantage. Hap- pily, signs are not wanting that the pubUc is beginning, of its own initiative to call ^for a recognition of the well-known wholesaling func- tion in gas rates. If this opportunity is grasped for a real education of the public as to the true facts and factors of costs and rates, it may be that sound conditions wiU prevail. Thus only can the best inter- ests of the community and the corporation be served to the fullest extent. For further understanding of some of the actions of the Uniform Rate by Meter, reference should be made to Chart I. Fixed Payment Rates, The system of paying so much per month per location is mentioned simply for its historical interest, and is evidently less desirable than even the "Uniform Rate by Meter," although, if it could be devel- oped with some considerable degree of justice, it would, from the managerial point of view, have many points in its favor. Comparison of Rates, As a matter of incidental interest, the author has prepared the following tabular statement of the various relations existing between the several systems of charging above outUned. This, in a crude way, sums up the comparative merits of these systems, under the different headings given, that system which has the least number of points against it appearing as the most desirable of those considered. The author is, however, free to admit that he is very far from being satisfied with any system as yet advanced. 23 COMPARATIVE STATEMENT OF POINTS OF VARIOUS SYSTEMS OP RATES. £s '^"*" >. i 1 g if 11 If ii IS. 1^ •sl II ii II 5a J ■^ in lU u.£ Ku Bia ou. S-U Fixed Pajrments Rates . . . 9 9 1 9 6 3 9 8 54 Uniform Rates by Meter . . 3 2 2 7 1 9 9 9 42 Minimum Meter Charges . . 8 8 3 4 5 6 7 7 48 Block Schedule 6 6 6 5 3 7 4 4 41 Step Schedule . 7 7 5 6 2 8 5 5 45 Specific Use . . 5 4 4 8 4 4 6 6 41 Two Rate Meters 4 5 7 3 9 5 3 3 39 Wright Demand 2 3 9 2 7 1 2 1 27 Doherty Rate . 1 1 8 1 8 2 1 2 24 PART IV. COST ANALYSIS. Turning now from the specific consideration of recognized rates, the author would present what appeal to him as the principal basic functions causing costs and on which, therefore, rates should be based in so far as practicable. To facihtate the analysis of these costs, he has prepared a statement of the operation of over sixty gas companies, the accoimts of which were available and which are stated in the following tables. In studying these, it should be borne in mind that the main question in his consideration is: "At what net additional cost can additional business be taken on?" In his mmd, it is from this view-point alone that that degree of saturation suggested in the opening paragraphs can be attained. Table I. presents the Assets and Liabilities of the "General Gas Company" in the usual form. Table I. ASSETS AND LIABILITIES OF THE "GENERAL GAS CO." Assets. Liabilities. 1 Real Estate $7,927,846.87 || Capital Stock $28,571,230.00 Machinery 11,755,140.85 Bonds 1,890,345 00 Mains 12,948,628.06 Notes 4,749,746.41 Meters 1,867,702.37 Balance to P. & L. 3,757,846.67 Other Equipment .... 98,097.21 ^ Materials 787,809.87 Working Capital .... 3,583,942.85 Total $38,969,168.08 Total $38,969,168.08 Table II. exhibits the Income of the "General Gas Co." which shows that the operating expenses are 73.1% of the Gross Income; that the Gross Income per annum is about 22.5% of the assets; and 25 the earnings, being interest and depreciation, are but about 6% of the assets. Table II. INCOME. Operating Expenses $6,421,375.00 73.1% Earnings 2,374,310.93 26.9% Gross Income from Sale of Gas $8,795,686.93 100.0% Ratio Gross Income to Assets 22.5% 1 •' Earnings " " 6.09% 1 Table III. gives certain physical data which show that the Com- pany is annually selling 33.8% of the gas which it is physically equipped to sell, if it operated twenty-four hours a day, three hundred sixty-five days in the year, at full load. It should be stated here that the unit of load factor used in this paper is the Maximum Daily Sales Capacity. In the operation of gas works with proper relations between manufacturing capacity and storage capacity, the Maximum Daily Sales Capacity is, in the opinion of the author, the correct factor vmit for only the manufactui'ing de- partment up to and including the holder. The distributing system should be invariably considered from the basis of its Momentary Capacity, but proper data on this are entirely lacking. Furthermore, as pointed out by Mr. H. L. Doherty, the load factors and capacities of the distributing system should not be taken solely as the total figures for the entire system as a imit, but should be carefully sub- divided as among the trunk mains, district feeder mains, district mains, street mains, service pipes, and meters. As an illustration of the propriety of so doing, it may be observed that a trunk main might easily be worked at over 15% load factor of its Momentary Capacity, whereas an ordinary service pipe having a capacity of say one million cubic feet a year might not average to pass over twenty thousand cubic feet during the year. Its load factor would there- fore be but 2% of its capacity. 26 Table III. PHYSICAL DATA. Population 2,663,962 Number of Customers 283,735 " " Miles of Main 2,783.4 Total Manufacturing Capacity for 1 year 22,221,747,500 cu. ft. " " " " 1 day 60,881,500 " Actual Make for 1 year 7,882,104,717 " Sales for 1 year 7,270,656,361 " " Sales Capacity for 1 year 21,500,000,000 "Sales Factor" (Ratio of Actual Sales to Total Annual Sales Capacity) 33.8% Table IV. gives certain standard physical and financial relations as to assets, income, etc. Table IV. PHYSICAL AND FINANCIAL RELATIONS. Assets. Gross Income. Operating Expenses. Earnings. Per MSold $5.36 $1,21 $0.88 $0.32 " Capita 14.62 3.30 2.41 .89 " Customer 137.34 30.99 22.63 8.36 " Mile of Main .... 14,000.56 3,160.05 2,307.02 853.02 " M Maximum Daily Ca- pacity 661.56 149.32 109.01 40.31 " M Demand DaUy Ca- pacity 936.12 211.29 154.25 57.03 In Table V. it is shown that the " General Gas Co." has a total daily sales capacity of nearly fifty-nine million cubic feet, while their max- imum day's sales or Maximum Daily Demand is not forty-two million, or about 70% of their Maximum Daily Sales Capacity and the min- imum day's sales is about 22% of the capacity, showing that there is a difference between the maximum and minimtun day's sales of 48.6% of the total capacity. 27 Table V. further apportions the assets of the Company in accord- ance with the maximum demand and the excess of the capacity over the maximum demand, which excess is 29.3% of the total capacity and will hereafter be referred to as the "Reserve Capacity." Table V. DISTRIBUTION OF ASSETS AND CAPACITY. Total Daily "Sales Capacity" 58,904,110 100.0% " Day's Maximum Sales 41,627,946 70.7 " " Minimum Sales 12,996,463 22.1 " Average Sales 27,312,205 46.3 Difference between Daily "Sales Capacity" and Maximum Day's "Demand" 17,276,164 29.3 Difference between Maximum Demanded Capac- ity and Minimum Day's Sales 28,631,483 48.6 Total Assets for Daily Sales Capacity $38,969,168.08 100.0% Portion of Assets for Maximum Demanded Sales . 27,551,201.83 70.7 " " " " Minimum Taken Sales . . 8,612,186.15 22.1 „ „ u « Average Daily Sales . . . 18,042,724.82 46.3 " " " " "Reserve Capacity" over "Maximum Demand" 11,417,966.25 29.3 Portion of Assets for Excess of "Maximum De- mand " over " Minimum Taking " 18,939,015.69 48.6 If one were to plot the daily sales as in Chart II. and draw the horizontal line "Minimum" at 22%, it would appear that, figuring on the daily basis, 22% of the plant is worked the year around to its fuU capacity. Drawing another horizontal hne at 70.7% "Maxi- mum Demand" would show that the portion of the plant which is used intermittently (48.6%) markets but 24.4% of its total annual capacity, while 29.3% of the Total Plant Capacity Ues idle. If the sales were uniform throughout the year, a plant of but 33.8% of the present capacity could make equal sales. The great burden of comparatively idle investment necessitated by the "Peak" is further illustrated by the fact that 52.2% of the Maximum Demanded Ca- pacity is here called for only in November, December, January, and February. This 52.2% of the Maxunum Demanded Capacity does work equivalent to but 16% of the annual Sales, while the remaining 47.8% of the Capacity called on yields 84% of the annual Sales. 28 The differentiation of costs as imposed by annual (and in truth daily) fluctuations in the output and capacity called for as shown by Chart II. may be further emphasized by apportioning the fixed charges of each section of the total plant to the output actually ob- tained from it. Over and above the so-called operating expenses amounting to $6,421,375.00 or 88.3c. per thousand sold, the costs caused by in- terest on the investment are $2,338,150.08 or 32.2c. per thousand sold on the average. Now let us divide the plant into three sections: first, take the 33.8% of it which produces all the gas except the Winter Peak; second, take the 36.9% which is called on to meet the Winter Peak; third, take the 29.3% of the total plant capacity held as Reserve. This latter now produces no gas, and therefore its interest charges cannot be specifically apportioned to any particular output. Sup- pose, therefore, that we apportion the $685,077.97 of charges due to the Reserve Capacity to the Winter Peak Capacity and to the bal- ance of the Capacity on the basis of 36.9% to 33.8%, or $357,558.37 to $327,519.59. We have an original charge due to the peak amount- ing to 36.9% of $2,338,150.08 or $862,777.38. To this we therefore add $357,558.37 as its share of the Reserve charges, making the total Peak charges $1,220,335.75. We also have an original charge due to the balance of the Capacity below the Winter Peak of 33.8% of $2,338,150.08 or $790,294.73. To this we hkewise add $327,519.59 as its share of the Reserve charges, making the total charges against the sales from this part of the plant $1,117,814.32. Now the Peak Capacity produces but 16% of the total sales or 1,163,305,018 cubic feet. The charges against it are $1,220,335.76 or $1,049 per thousand cubic feet it seUs. Add a supposedly uniform Operating Expense of 88.3c. per thousand cubic feet, and the Peak Gas apparently costs $1,932 per thousand. On the other hand, the balance of the plant below the Peak pro- duces 84% of the sales or 6,107,351,343 cubic feet. The charges against it are $1,117,814.32 or but $0,182 per thousand cubic feet it sells. As before, add 88.3c. per thousand as operating expenses, and it appears that this gas cost a total of but $1,065, while the Peak gas cost $1,932 per thousand. And still some people think it 29 QifKiTr Mccissmne Br ifinra fax < — St2 fc OF Max. DsMAf/o -^ QaPACIT/ Fo/t V?£S£fiy£ MO M/Jr£ff PjTA/f 66.Z ^o or CA/'ACjry 2).3 3* oFCAMcm' - CtFACITf £ SAUS CAf^c/rv Sipt/Ai ro' SAiss ~ 33.B%OF CAfiACirjr 30 fair and proper to sell it aU uniformly at about fl.21 per thousand. If the day curve as well as the year curve were considered, the differ- ence would be even greater. The plant would evidently be more efficient physically and finan- cially if this peak (and the investment it has called for) had never been allowed to develop. As it is a burden generally present, those customers causing it should, in equity, themselves bear the burden they impose instead of dividing it uniformly with the more uniform long hour burning customers. For efficient and low-priced operation, the penalization of "peak building" is a necessity, nor should the de- pression of the "Peak" be contemplated with aught but satisfaction, provided countervailing sales are made at other periods. The author believes that the constant consideration of the areas and relations exemplified in Chart II. is necessary to the development of the higher average load factor which must forerun low prices and good dividends. In Table VI. are shown the operating expenses and charges in the iisual manner. This system of statement is, in the opinion of the author, fundamentally wrong. Table VI. PLAIN OPERATING STATEMENT. Amounts. PerM Sold. Per Custo- mer per Annum. Per M Daily Sales Capacity. Per Cent. Mfg. Expense (Net) . $4,435,927,48 $0,611 $15.64 $75.31 50.4 Distribution. . . 810,463.58 0.111 2.85 13.76 9.2 Management .... 546,479.24 0.075 1.92 9.27 6.2 Taxes and Incidentals 628,504 70 0.086 2.22 10.67 7.2 Total Operating Ex- pense $0,883 $22.63 73.0 $6,421,375.00 $109.01 Interest 447,230.12 0.061 1.57 7.59 5.2 Dividends 1,890,919.96 0.261 6.66 32.10 21.4 Surplus 36,160.85 0.004 0.13 0.62 0.4 Gross Income from SaleofOas .... $8,795,685.93 $1,209 $30.99 $149.32 100.0% 31 Table VII. exhibits a method of stating operating expenses and charges which, in the author's mind, is more nearly correct. It will be observed that the assets of each department are stated imder sundry items. The taxes, incidental expenses, and charges are apportioned for each item in accordance with its relation to the total as per the second column. In the third column a charge of 6% is entered against each item of asset, and in the fourth column should be entered the amount of depreciation to which each item is annually subject. As the question of depreciation is a volume in itself and invariably gives rise to unconclusive discussion, this colunm has been left blank, 6% on each item of investment being allowed to rep- resent the total of interest and depreciation, although this is obvi- ously too small an allowance for interest and depreciation together. The fifth column states the annual charges and the operating expenses of each department. This method of statement seems worthy of consideration in view of the fact that it is impossible to determine, for instance, the real cost of gas in the holder unless taxes, charges, and depreciation on the plant necessary to put the gas in the holder are made a part of that cost. Without so doing, we are unable to currently determine whether expensive machinery with a low opera- ating cost or cheap machinery with a high operating cost wiU give the best results on the final balance sheet. In this connection, it should be borne in mind that, generally speak- ing, machinery which operates continuously throughout the day and year had better be comparatively expensive machinery with a mini- mmn operating cost, while machinery used but intermittently, as for day and winter peaks, can well be cheap machinery with a high oper- ating cost. The second section of Table VII. further exhibits the fact that the General Gas Co., paying its operating expenses, taxes, and 6% on its several assets, but no specific depreciation, made a net balance to profit and loss of but $36,160.85 or less than one-tenth of one per cent, on its assets, while the gross income from the sale of gas was practically $1.21 per thousand cubic feet sold. 82 Table VII. CURRENT CHARGES OPERATmC STATEMENT. Investment Assets. Taxes and Incidentals. Charges at 6%. Depre- ciation Totals. Manufacture Real Estate 85,549,492.81 $89,503.75 $332,969.57 $422,473.32 Machinery 11,755,140.85 189,589.96 705,308.45 894,898.41 Materials . . 787,809.87 12,705.62 47,268.59 59,974.21 Mfg. Expense 4,435,927.48 Totals . . . $18,092,443.53 $291,799.33 $1,085,546.61 (?)" $5,813,273.42 Distribution Real Estate $1,189,177.03 $19,179.38 $71,350.62 $90,530.00 Mains and Services 12,948,628.06 208,839.01 776,917.68 985,756.69 Teams & Other Equipment 44,914.48 724.39 2,694.87 3,419.26 Dist. Expense 810,463.58 Totals . . . $14,182,719.57 $228,742.78 $850,963.17 (?) $1,890,169.53 Management $1,189,17703 $19,178.97 $71,350.62 Real Estate $90,529.59 Meters . . . 1,867,702.37 30,124.05 112,062.14 142,186.19 Office Equip- ment . . . 53,182.73 854.65 3,190.96 4,045.61 Working Capital . . 3,583,942.85 57,804.92 215,036.58 272,841.60 Management Expense . 546,479.24 Totals . . . $6,694,004.98 $107,962.59 $401,640.30 (?) $1,056,082.13 Grand Totals $38,969,168.08 $628,504.70 $2,338,150.08 (?)" $8,759,525.08 33 Table VII. (continued). Total Costs (as above). Per n Sold. Per Customer per Annum. Per M of Total Daliv Sales Capacity. Per Cents. Manufacture Real Estate . . $422,473.32 $0.0581 $1.49 $7.17 7.2% 4.8% Machinery . . 894,898.41 0.1231 3.16 15.19 15.4 10.2 Materials . . . 59,974.21 0.0082 0.21 1.02 1.1 0.7 Mfg. Expense . 4,435,927.48 0.6102 15.63 75.31 76.3 50.4 $20.49 $98.69 100.0% 66.1% Totals .... $5,813,373.42 $0.7996 Distribution Real Estate . . $90,530.00 $0,013 $0.32 $1.54 4.8% 1.+% Main & Services 985,756.69 0.1355 3.47 16.73 52.2 11.2 Teams & Other Equipment . 3,419.26 0.0004 0.02 0.05 0.1 0.1 Dist. Expense . 810,463.58 0.111 2.85 13.76 42.9 9.1 $6.66 $32.08 100.0% 2U% Totals .... $1,890,169.53 $0.2599 Management RealEsUte . . $90,529.59 $0.0124 $0.32 $1.54 8.6% 1.1% Meters .... 142,186.19 0.0195 0.50 2.42 13.4 1.6 Office Equip- ment .... 4,045.61 0.0005 0.01 0.06 0.4 0.1 Working Capital 272,841.50 0.0376 0.96 4.64 25.8 3.1 Management Ex. 546,479.24 0.0752 1.93 9.27 51.8 6.2 $3.72 $17.93 100.0% Totals .... $1,056,082.13 $0.1452 12.1% Grand Total . . $8,759,525.08 $1.2047 $30.87 $148.70 99.6% 99.6% P. & L. Bal. . . 36,160.85 0.0049 0.12 0.62 0.4 0.4 $30.99 100.0% Gross Income from Sale of Gas $8,795,685.93 $1.2096 $149.32 10.00% 34 Table VIII. sununarizes the totals from Table VII. In the 2d column of Table VIII. it is of interest to note that the gas in the holder costs 79.9c. and not 61c., because it bears a charge of 18.9c. per M; likewise distribution costs 25.9c. and not lie. because of a charge of 14.8c. ; also management, because of the equipment and re- sources necessary thereto, costs 14c. and not 7c. per M, while the profit balance over and above but 6% interest and depreciation charge and operating expenses was but the munificent sum of four-tenths of a cent per M with gas at about $1.21 per M. Table VIII. SUMMARY OF OPERATING EXPENSES AND CHARGES. Amounts. PerM Sold. Per Cus- tomer per Annum. Per M of Total Daily Sales Capacity. Per Cents. Manufacturing . $4,435,927.48 $0.6102 $15.64 $75.31 76.3% 50.4% Expenses . . . Charges .... 1,377,345.94 0.1894 4.85 23.38 23.7 15.7 Totals .... $5,813,273.42 $0.7996 $20.49 $98.69 100.0% 66.1% Distribution Expenses . . . $810,463.58 $0.1114 $2.85 $13.76 42.9% 9-1% Charges .... 1,079,705.9.1 0.1485 3.81 18.32 57.1 12.3 Totals .... $6.66 $32.08 100.0% 21.4% $1,890,169.53 $0.2599 Management $546,479.24 $0.0761 $1.93 $9.27 51.8% 6.2% Expenses . . . Charges . . . 509,602.89 0.0701 1.79 8.66 48.2 5.9 Totals .... $1,056,082.13 $0.1452 $3.72 $17.93 100.0% 12.1% Qrand Totals $8,759,525 08 $1.2047 $30.87 $148.70 99.6% 99.6% P. & L. Bal. . 36,160.85 0.0049 0.12 0.62 0.4 0.4 Gross Income from Sale of Gas $1.2096 $30.99 100.0% 100.0% $8,795,685.93 $149.32 35 Analytical and Differential Cost Finding. Up to this point accounts have been considered only under the usual headings of Manufacturing, Distribution, and Management, or more properly Sales Expense, charges having been placed under each one of these headings as stated. The costs stated under these terms are purely operative, and are grouped and arranged, it would seem to the author, more from the point of view of internal convenience and physical sequence than with any view to considering the real economic factors of cost, as determined by the character of the business. This may be accounted for, perhaps, by the fact that, in the earlier days, the gas business was conducted more from its physical view-point than from its business view-point. The day would now seem to have arrived when most of the savings and dividends for which the retort house can be held responsible are being made. Their continuance and extension are in the hands of the management and commercial departments, and for the guidance of these it is of prime necessity that the costs of taking on additional business be those which receive the closest scrutiny rather than the costs of conducting the business as it now stands, the present cost being of course held as low as pos- sible. To this end, the author has grouped costs under the headings given in Table IX. In considering these, it should be borne in mind that, for instance, the operating expense varying with "Output Only" is that operating expense at which one or more units of gas or electricity may be produced in addition to those now made. This amount being determined. per thousand or per K.W. Hour, it is apphed backward, perhaps imder special modifications in instances, over the entire pro- duction, the amount so arrived at being the total operating expense varying with "Output Only." The difference between the actual total operating expense — except for special modifications — and the variable amount so arrived at, in part constitutes essentially the fixed operating expense uninfluenced in amount by output. In this way a base line is arrived at, below which costs do not go excepting imder the influence of abnormal'modifications. This same line of reasoning is applied to other groups of expenses and charges, as defined in the following table: 36 Table IX. HEADINGS OF "ADDITIONAL BUSINESS" SYSTEM OF COST ANALYSIS. A Charge to CONSUMPTION CHARGE. OPERATING EXPENSE VARYING WITH "OUTPUT" ONLY. Operating expense varying with output only and pro- portional to the actual sales of units on the basis of the net additional operating expense caused solely by and proportional to an increase in the sales of units by one or more units. B Charge to CONSUMPTION CHARGE. CHARGES VARYING WITH "OUTPUT" ONLY. Depreciation and other "Charges" varying with output only and proportional to actual sales of units on the basis of the net additional depreciation, etc., caused solely by and proportional to an increase in the sales of units by one or more units from the present active equipment. C Charge to CUSTOMER CHARGE. OPERATING EXPENSE VARYING WITH "NUMBER OF CUSTOMERS" ONLY. Operating expenses varying with the number of Cus- tomers only and proportional to the actual number of Customers on the basis of the net additional operating expense incurred solely by and proportional to increas- ing the present number of Customers by one or more. D Charge to CUSTOMER CHARGE. CHARGES VARYING WITH "NUMBER OF CUSTOMERS" ONLY. Interest and other "Charges" varying with the number of Customers only and proportional to the actual num- ber of Customers on the basis of the net additional an- nual "Charges" incurred solely by and proportional to increasing the present number of Customers by one or more. 37 Table IX.— (Continued.) Part 2. E Charge to DEMAND CHARGE. OPERATING EXPENSE VARYING WITH ACTUAL "DEMAND" ONLY. Operating Expenses varying with "Demanded Sales Ca- pacity" only and proportional to the actual number of units of Sales Capacity Demanded on the basis of the net additional operating expense caused solely by and pro- portional to increasing the present Demanded Sales Ca- pacity by one or more units of Capacity. F Charge to DEMAND CHARGE. CHARGES VARYING WITH ACTUAL "DEMAND" ONLY. Interest and other "Charges" varying with "Demanded Sales Capacity" only and proportional to the actual num- ber of units of Sales Capacity Demanded on the basis of the net additional annual "Charges" incurred solely by and proportional to increasing the present "Demanded Sales Capacity" by one or more units of Capacity. Q Do NOT CHARGE WHERE THE MAR- KET SHOULD NOT BEAR IT. OPERATING EXPENSE VARYING WITH "RESERVE CAPACITY" ONLY. Operating Expenses caused solely by and proportional to the maintenance of such part of the total plant as is in excess of the actual Maximum Demanded Capacity. H Do NOT CHARGE WHERE THE MAR- KET SHOULD NOT BEAR IT. CHARGES VARYING WITH "RESERVE CAPACITY" ONLY. Interest and other "Charges" caused solely by and pro- portional to the existence of such part of the total plant as is in excess of the actual Maximum Demanded Capacity. 38 Table IX.— (Concluded.) Part 3. I Do NOT CHARGE WHERE THE MAR- KET SHOULD NOT BEAR IT. SPECIAL AND GENERAL FIXED OPERATING EXPENSES. Operating Expenses not included in or governed by "OUTPUT," "CUSTOMERS," "DEMAND," or "RE- SERVE," such as "Fixed Operating expenses," "Special Current Expenses," as current legal claims, etc., and all other general current expenses not chargeable in A, C, E, andG. J Do NOT CHARGE WHERE THE MAR- KET SHOULD NOT BEAR IT. SPECIAL, GENERAL, AND FIXED PREPARATION CHARGES. Interest and other "Charges" not included in or gov- erned by "OUTPUT," "CUSTOMERS." "DEMAND," or "RESERVE," such as all "Fixed Charges" not covered by B, D, F, or H. "Charges" on "experimentation invest- ments," "preparation" and legal expenses chargeable to capital account and all othere specia and general annual charges on capital account not chargeable in B, D, F, or H. NOTE : The above headings of analytical accounts refer only to the general and average figures of each item. Further differentiation may with propriety be made as among Specia] Customer Costs in Expenses and Charges due to distance from distributing centres, unusual individual costs of connection, etc., also individual differentiation may be made in the Demand Costs due to Factor of Non-coincidence, etc. Headings I and J may be subjected to any further degree of analysis for their apportion- ment between "Output," "Customers," and "Demand," but no variables with "Output," "Customer," or "Demand," should find place in I or J. P! It^will be noted in the above table that the marginal column sug- gests where the various items of cost may with propriety and expe- diency be charged under whatever rate formula may be adapted or evolved. This system of accoxmts has been applied under the headings above defined to the accoimts of the "General Gas Company," but it is with great regret that the author finds it impracticable to elaborate and define the exact system or method of apportionment used in so doing. It may be, however, that such a procedure would be entirely superfluous, as special conditions existing in each locaUty might mod- ify these methods and their results beyond recognition. In the following table the items of expenses as summarized in Table VIII. are set forth as reapportioned under the five expense headings stated in Table IX. 39 Table X. ANALYSIS OF EXPENSES. Amounts. Per Unit of Analysis. Manufacturing $2,137,572.97 $0,294 per M Sold Varying with Output Only Varying with Number of Customers Only Varying with Demand Only 69,146.81 $1.66 per M Demanded Capacity Varying with Reserve Capacity Only . . . 21,179.64 $1.22 per M Reserved Capacity General Expenses . . 2,208,028.06 Total $4,435,927.48 Distribution Varying with Output Only Varying with Number of Customers Only $127,648.02 $0.44 per Customer per Annum Varying with Demand Only 277,583.78 $6.66 per M Demanded Capacity Varying with Reserve Capacity Only 122,946.54 $7.11 per M Reserved Capacity General Expenses . . . 282,285.24 Total $810,463.58 Management $26,471.82 $0,003 per M Sold Varying with Output Only Varying with Number of Customers Only 297,464.71 $1.04 per Customer per Annum Varying with Demand Only 51,747.11 $1 .24 per M Demanded Capacity Varying with Reserve Capacity Only . 24,236.41 $1 .40 per M Reserved Capacity General Expenses . . . 146,559.19 Total $546,479.24 Grand Total $5,792,870.30 It is interesting to note, as set forth in this table, that the excess gas costs, in manufacturing expenses, about thirty cents per thou- sand, while the fixed manufacturing expenses or "stand-by" manu- facturing expenses are almost one-half of the total, so that, theo- retically, if double the output were obtained from the present works. 40 it would be obtained at an increased works operating expense of but about 50%. Similar observations could be made upon the distribu- tion expenses and management expenses. Table XI., Lq a somewhat similar statement of apportionment, dis- tributes among the five "charges" accoimts defined in Table IX. the many items of charge simamarized in Table VIII. Here again it is of interest to note the comparatively large fvmction supplied by general charges. Table XI. ANALYSIS OF CHARGES. Amounts. Per UDit of Analysis. Manufacturing Varying with Output Only $69,146.41 $0.0009 per M Sold Varying with Number of Customers Only . . . Varying with Demand Only 341,296.73 $8.19 per M Demanded Capacity Varying with Reserve Capacity Only . . . 140,161.92 $8.11 per M Reserved Capacity General Charges . . . 826,740.88 Total $1,377,345.94 Distribution Varying with Output Only Varying with Number of Customers Only . $158,245.93 $0.55 per Customer per Annum . Varying with Demand Only 239,246 81 $5.74 per M Demanded Capacity Varying with Reserve Capacity Only . . . 99,041.89 $5.73 per M Reserved Capacity General Expenses . . . 583,171.32 Total $1,079,705.95 Management Varying with Output Only $51,368.28 $0,007 per M Sold Varying with Number of Customers Only . . 49,668.41 $0.17 per Customer per Annimi Varying with Demand Only 107,.549.02 $2.58 per M Demanded Capacity Varying with Reserve Capacity Only . . . 44,571.24 $2.57 per M Reserved Capacity General Expenses . . . 256,445.94 Total $509,602.89 Grand Total $2,966,654.78 41 Table XII. summarizes Tables X. and XL, stating the total costs under the headings of "Output," "Customers," "Demand," "Re- serve," and "General" for the Manufacturing, Distribution, I and Management Departments and giving the totals. Table XII. SUMMARY OF ANALYSIS. Manufacturing. Distribution. Management. Total. Output A Expenses . . $2,137,572.97 826,471.82 82,164,044.79 B Charges .... 69,146.41 51,368.28 120,514.69 Totals $2,206,719.38 $77,840.10 $2,284,559.48 Customers .... 8127,648.02 8297,464.71 $425,112.73 C Expenses . . . D Charges .... 158,245.93 49,668.41 207,914.34 Totals $285,893.95 $347,133.12 $633,027.07 Demand E Expenses . . . 869,146.81 8277,583.78 851,747.11 $398,477.70 F Charges .... 341,296.73 239,246.81 107,549.02 688,092.56 Totals $410,443.54 $516,830.59 $159,296.13 $1,086,570.26 Reserve Q Expenses . . . 821,179.64 8122,946.54 824,236.41 8168,362.59 H Charges . . . 140,161.92 99,041.89 44,571 .24 283,775.05 Totals $161,341.56 $221,988.43 $68,807.65 $452,137.64 Qeneral I Expenses . . . 82,208,028.06 8282,285.24 8146,559.19 256,445.94 82,636,872.49 J Charges .... 826,740.88 583,171.32 1,666,358.14 Totals $3,034,768.94 $865,456.56 $403,005.13 $4,303 230.63 Grand Totals . . . $5,813,273.42 $1,890,169.53 $1,056,082.13 $8,759,525.08 NOTE : The letters A, B, C, etc., appearing in the first column refer each item to the account to which it belongs as defined in Table IX. 42 These totals are exhibited ia Table XIII. under the headings of the "Additional Business" System of accounting, the totals of ex- penses and charges for each major group being given and their rela- tions being stated in terms of per cent. Table XIII. DISTRIBUTION OF EXPENSES AND CHARGES. Expenses. Charges. Totals. 1 Output . . Customers . Demand Reserve . . General . . Totals . . 95% 5% 100% $2,164,044.79 38% $120,514.69 4% $2,284,559.48 26% 67% 33% 100% $435,112.73 7% $207,914.34 7% $633,027.07 7% 36% 64% 100% $398,477.70 7% $688,092.56 23% $1,086,570.26 13% 37% 63% 100% $168,362.59 3% $283,775.05 10% $452,137.64 5% 61% 39% 100% $2,636,872.49 45% $1,666,358.14 56% $4,303,230.63 49% 66% 34% 100% $5,792,870.30 100% $2,966,654.78 100% $8,759,525.08 100% The last column of this table shows the per cent, relation existing between the variable "Output," "Customer," "Demand" and "Re- serve" sources of cost and the General Fixed and Preparation Ex- penses and Charges. It wUl be noted that the Demand here is but thirteen per cent. This is because the Demand is figured on a daily basis instead of a momentary basis, and therefore takes no cognizance of the evening peak, and, secondly, the Demand, excluding the "Re- serve," is figured on the cost of increasing the capacity, but not on the total capacity cost. If the latter were the case, practically all charges, as well as most of the taxes, would appear against Demand, as in the original Wright Demand System. The charges alone would, in the figures here presented, in this case make the Demand Function over 25% of the total cost; and, if the Demand were figured as it should be, on a momentary instead of on a daily basis, it might weU be that the Demand Function would be very much over twenty-five per cent, of the cost. 43 Table XIV. collects and distributes the items of cost per unit of cost given in the last column of Tables X. and XI., together with the amounts of general cost which are not specifically divisible. Table XIV. ITEMS OF COSTS PER UNITS OF ANALYSIS. Manufacturing. Distribution. Management. Totals. Output Cost per JVI Sold $0,294 $0,003 $0,297 Expenses .... Charges 0.009 0.007 0.016 Totals per M Sold . . . $0,303 $0.01 $0,313 Customer Cost per Cus= tomer per Annum $0.44 $1.04 $1.48 Expenses Charges 0.55 0.17 0.72 Totals per Customer per Annum $0.99 $1.21 $2.30 Demand Cost per M De= manded Capacity 81.66 $6.66 $1.24 $9.56 Expenses Charges 8.19 5.74 2.58 16.51 Totals per M of JVlaxi= mum Demand . . . $9.85 $12.40 $3.82 $26.07 Reserve Cost per M Re= served Capacity $1.22 $7.11 $1.40 $9.73 Expenses Charges 8.11 5.73 2.57 16.41 Totals per IW of Re- served Capacity. . . $9.33 $12.84 $3.97 $26.14 General Cost $2,208,028.06 $282,285.24 $146,559.19 $2,636,872.49 Expenses Charges 826,740.88 583,171.32 256,445.94 1,666,358.14 Totals Individually In= determinable . . . $3,034,768.94 $865,456.56 $403,005.13 $4,303,230.63 44 Table XV. states the totals for each item of "additional cost," and gives the general cost not specifically apportionable among the four preceding items. It is interesting to note that this latter is 48.9% of the gross income; that is, in the accomits as above exhibited, we have an item comprising almost half the total cost, being made up of the general and fixed expenses and charges not varying with and imgoverned by either the Output, Number of Customers, Maxi- mum Demand, or the Reserve Capacity. The fact that this item here appears as 48.9% of the total cost is not, in the mind of the author, of especial and final interest. It might be an3rwhere between 25% and 75% of the total costs under different circiunstances and methods of apportionment, but the fact that it does exist in a very considerable quantity and relation to the total cost is, in his mind, of paramount importance in the consideration of any rate system, and will be referred to at some length when price making is later considered. Table XV. ITEMS OF BATE CHARGE. Output 7,270,656,361 cu. ft. Constant net cost per M Sold $0,313 Number of Cus- tomers .... 283,735 Constant net cost per cus- tomer per Annum $2.20 Maximum Daily Capacity Demanded 41,627,946 cu. ft. Constant net cost per M of Daily Capacity Demanded $26.07 Excess Daily Ca- pacity in Reserve over Demanded Capacity . . . 17,276,164 cu ft. Constant net cost per M of Daily Capacity Keserved $26.14 Total General Cost not Specifically Apportionable . $4,303,230.63 Per Cent, of dross Income 48.9% 45 Table XVI. sets forth the amounts and costs under each one of the major headings of "Consumption," "Number of Customers," and "Demand." These are the directly apportionable charges, and are, apparently, only 46% of the total. The table then proceeds to give the items in total of the Reserve Capacity Costs and the General Costs which are not directly apportionable to any individual customer, and which amount to 54% of the total cost. They are the " Joint Costs." Table XVI. RATE DISTRIBUTION OF COSTS. Amounts. Per Cents. Consumption Charge .... $2,284,559.48 27% @ $0,313 per M Sold Annual Customers Charge .... 633,027.07 7 @ $2.20 per Customer per Annum Demand Charge . 1,086,570.26 12 @ $26.07 per M of Maximum Day's Demand Total Directly Ap= portionable Charges 46% 45.5% of Gross Income $4,004,156.81 Reserve Capacity $452,137.64 5 General Costs . . 4,303,230.63 49 Total of Not Di= rectly Apportion- able Costs . . . $4,755,368.37 54% 54.1% of Gross Income Grand Total . . . Too% 99.6% of Gross Income $8,759,535.08 P. & L. Balance . 36,160.85 00.4% of Gross Income Gross Income from Sale of Gas . . $8,795,685-93 100.0% 46 Table XVII. exhibits the origin of the specifically unapportionable Reserve and General Expenses and Charges or "Joint Costs, " stating them in amounts. Table XVII. COST ORIGINS OF "RESERVE" AND "GENERAL" EXPENSES AND CHARGES. Alanufacturing. Distribution. Management. Totals. Reserve Expenses . . . $21,179.64 $122,946.54 $24,236.41 $168,362.59 Charges 140,161.92 99,041.89 44,571.24 283,775.05 Totals $161,341.56 $231,988.43 $68,807.65 $452,137.64 General Expenses . . $2,208,028.06 $282,285.24 $146,559.19 $2,636,872.49 Charges 826,740.88 583,171.32 256,445.94 1,666,358.14 Totals $3,034,768.94 $865,456.56 $403,005.13 $4,303,230.63 Grand Totals . . . $3,196,110.50 $1,087,444.99 $471,812.78 $4,755,368.27 While noting, as stated in Table XV., that the yearly general cost, here apparently 48.9% of the total annual cost, is not specifically apportionable and is, in a sense, fixed by the general magnitude and history of any given locality, it is of collateral interest that, by the same system of analysis and apportionment, the fixed "Preparation" or "General" investment, not varying with extensions or replacals, is about twenty-four and a half million dollars or sixty-two per cent, of the total assets of about thirty-nine million doUars, while the in- vestment variable with and governed by "Additional Business" is about thirty-eight per cent, or about fourteen and a half miUion dol- lars. While these figures on the relation between what may be called the accumulated preparation investment and the relative invest- ments or extensions are not specifically applicable, yet they are of interest in connection with relations as between "total actual live investment to date" and "present replacal values" and "total prob- able cost of a new plant to do equal service." When considering these, it should be remembered that it is very much cheaper to, at the present time, build one large plant than to 47 have accumulated a plant of equal capacity during, say, the last fifty years. Among the items causing this are the varying state of the art, varying costs of construction, development of pubhc and corporate policies, and many other elements embodying past errors in himian judgment. Conclusion of "Additional Business" Analysis. In the above description the author has been obhged to use figures, but, as stated at the outset, they have been used entirely empirically and with the sole intent of illustrating what he believes to be the basic principles of the "Additional Business" system of cost finding. The specific items of amoimts, costs, etc., appearing above have not, in his mind, any specific individual value or interest, and will be, in his opinion, variable for each locahty under many modifying and determining conditions over which no iomiediate control can be exercised. But the phase of the statement which does appeal to him is the apparent fact that the actual net business costs of "Additional Business" are very much lower than would ever be made apparent by our unfortunate system of accounting and reasoning entirely in "Amounts and Averages." This "Amounts and Aver- ages" system reaUy teUs but little more than income and outgo, as was once stated by a President of a Gas Company having several nuUions of assets, who is said to have remarked that in the gas busi- ness there were only two accoimts, "Money coming in" and "Money going out." This fact of the comparatively low items and totals of " Additional Business" is determinable with comparative ease and exactness for any locahty if the basic accounts are kept in such manner as to make the items available for analysis and synthesis. True basic costs are, in the opinion of the author, necessary before any manager of a gas or electric proposition can say how low he can go in price or how high he must go, what business he can take on or what business he must throw off or carry at a loss. To illustrate this, let us compare the data furnished by the simply "Amounts and Averages" system and the "Additional Business" system, carrying the comparison right through to the net earnings. PART V. COMPARISON OF STATEMENTS AND RESULTS under the "Amounts and Averages" System and under the "Additional Business" System. The following table states the main items of data furnished by the two systems. Table XVIII. COMPARISON OF "AMOUNTS AND AVERAGES" STATEMENT WITH "ADDITIONAL BUSINESS" ANALYTICAL STATEMENT. "AMOUNTS AND AVERAGES" STATEMENT AS PER TABLE VI. Amounts. Per M Sold. Per Cent. Manufacturing Exp. . . $4,435,927.48 $0,611 50.4% Distribution Exp. 810,463.58 0.111 9.2 Management Exp 546,479.24 0.075 6.2 Taxes and Incidentals 628,504.70 0.086 7.2 Total Operating Expense $6,421,375.00 $0,883 73.0 Interest 447,230.12 0.061 5.2 Dividends 1,890,919.96 0.261 21.4 Surplus 36,160.85 0.004 0.4 Total Investment Earnings $2,374,310.93 $0,326 27^0 Total Gross Income from Sale of Qas . $8,795,685.93 $1,209 100.0% 49 "ADDITIONAL BUSINESS" ANALYTICAL STATEMENT. Amounts. Per Unit. % Total Cost. % Gross Income. Costs Individually Apportionable $2,284,559.48 $0 313 per M Sold 27% 25.9% Output Cost . . . Customer Cost . . 633,027.07 ^0 per Customer per Annum 7 7.2 Demand Cost . . . 1,086,570.26 26.07 per M Daily Max. Demand 12 12.4 Total Individually Apportionable Costs $4,004,156.81 46 45.5 Costs Individually Unapportionable $452,137.64 26.14 per M Daily Reserve Capacity 5 5.2 Reserve Cost . . . Greneral Cost . . . 4,303,230.63 49 48.9 Total Individually Unapportionable Costs $4,755,368 27 54 54.1 Total Costs .... $8,759,525.08 100% 99.6% Surplus Earnings . 36,160.85 0.4 Total Gross Income from Sale of Qas $8,795,685.93 100% Consider the two points of view which a manager would have in contemplating his business, in seeking to increase it: first, if he looks at it by the Ught of the "Amounts and Averages" statement, and then by that of the "Additional Business" statement. From the "Amoimts and Averages" statement it would seem evi- dent that his gas, paid for, costs him 88.3c. at the burner, and that his balance, to investment earnings, on each thousand cubic feet sold is the margin between whatever price he gets and 88.3c. At present he averages to get nearly $1.21 per thousand. Therefore his margin of profit to earnings on capital account is 32.6 per thousand sold. He may think that additional gas would not cost him 88.3c. at the burner, but he doesn't know it, because his statement which should be his searchhght doesn't tell him so. He would probably have a spasm at the bare thought of selling any gas at less than it cost him to put it at the biu-ner, — apparently cost him. But let us say that he realizes that, to get an increase in sales, he must reduce 50 his price. He may reduce it "en masse" horizontally by five or ten cents, and perhaps, with luck and push, will get a proportionate in- crease in sales. Or he may, by some differential rate device, hold his present markets at essentially present prices and endeavor to sell an excess at say an average price for the excess of $1. He certainly would not consider seDing any gas below eighty-eight cents, as that would show him an apparent loss. Now let us suppose that, holding his present markets, he sells an addition of 20%, about one and a half bilhon cubic feet, at one dollar per thousand. He certainly could not expect a much greater imme- diate increase, because one dollar is not enough below $1.21 to allow his entering very wide markets hitherto unoccupied. From his state- ment he would expect to make 11.7c. per thousand, or about one hun- dred and seventy thousand doUars. As far as his statement would tell, he would expect the next year's statement to be about as follows : — Table XIX. "AMOUNTS AND AVERAGES" SYSTEM, RESULTS OF TWENTY PER CENT. INCREASE IN SALES. Old Business $6,421,375.00 Operating Expenses for 7,270,656,361 cu.ft. at burner @ 88.3c. Earnings on account of Investment 7,270,656,361 cu. ft. @ 32.6c. 2,374,310.93 Gross Income from Sale of Gas (Old Business) 88,795,685.93 Average price per M $1,209+ New Business Operating Expenses for 1,454,131,272 cu. ft. (20% Increase) @ 88.3c. $1,283,997.91 Earnings on Investment 1,454,131,272 cu. ft. @ 11.7c. . . . 170,133.36 Gross Income from Sale of Gas (New Business) $1,454,131.27 Average price per M $1.00 Total Business $7,705,372.91 Operating Expense for 8,724,787,633 cu. ft. @ 88.3c. . . . Earnings on account of Investment 8,724,787,633 cu. ft. @ 29.1c. 2,544,444.29 Total Gross Income from Sale of all Gas 810,249,817.20 Average Price per M on Total Sales $1,174 51 He has increased his sales by 20%, decreased his average price, the real and only price in which the whole commiinity as a commu- nity is interested, from about $1.21 to about $1.17 (less than 4c. or 2.8%), and has increased his earnings on investment by about one hundred and seventy thousand dollars, or from 6.1% to 6.5% on his assets, an increase of foiu--tenths of a per cent. We will assume that he did not increase his plant capacity, as he had a reserve of 29.3%. Let him make his additional earnings on only his old investment. On the other hand, let us suppose he is equipped with an "Addi- tional Business" analysis. His average price is about $1.21 as be- fore. His operating expenses and earnings are the same. His in- dividually apportionable costs, amounting to over four million dol- lars, or forty-six per cent, of the total costs, are being met as well as his individually unapportionable costs, which latter amount to over four and three-quarters millions of dollars, or 54% of the total costs. These unapportionables are placed where the market can stand them, since they are now being met in full. But he also knows that additional gas costs him only thirty two cents, and not eighty-eight and three-tenths cents per thousand; that each additional customer costs him $2.20 per annum; and that his plant equipment or capacity costs him per annum twenty-six dollars and seven cents per thousand of Daily Demanded Capacity and twenty-six doUars and fourteen cents per thousand of DaUy Reserve Capacity. He also knows that $4,303,230.63 (48.9%) of all his expenses and charges are not, within very broad limits, governed in any way by his Output, Customer, or Demand condition at present. Let us assume that in order to increase his sales he decides to enter new fields or methods of use, as for industrial and domestic fuel gas and power gas. To reach these, his price has got to range say be- tween thirty-five cents and one dollar and twenty-one cents per thou- sand. Let us say that by a differential rate device, as before assumed, he retains his former markets, essentially undisturbed, and effects an increase of say sixty per cent, in sales at an average total price or cost to customers of fifty-five cents per thousand, selling thus about four bUhon cubic feet (sixty per cent.) to about fifty-seven thousand new customers (twenty per cent.). Let us further assume that he carries the same amount of Reserve Capacity (which is unnecessarily 52 large) and also that his new wholesale business is conducted at twice the old load factor which would be fair. Having brought this about, we would have the following statement : Table XX. "ADDITIONAL BUSINESS" SYSTEM. RESULTS OF SIXTY PER CENT. INCREASE IN SALES. Old Business $4,303,230.63 General Costs Output Costs 7,270,656,361 cu. ft. @ 31.3c 2,284,559.48 Customer " 283,735 customers @ $2.20 633,027 07 Demand " 41,627,946 cu. ft. daily @ $26.07 1,086,570.26 Reserve " 17,276,164 cu. ft. daily @ $26.14 . . 452,137.64 Surplus (Bal. to P. & L.) . 36,160.85 Gross Income from Sale of Gas (Old Business) .... $8,795,685.93 Average price per M $I.20<> New Business Output Costs 4,362,393,817 cu. ft. (60%) @ 31 .3o. . . $1,365,429.26 Customer " 56,747 customers (20%) @ $2 20 . . . 124,843.40 ♦Demand " 12,488,384 cu. ft. daily @ $26.07 325,572.17 Surplus 583,471.77 Gross Income from Sale of Gas (New Business) .... $2,399,316.60 Average Price per JVl on New Business $0.55 Total Business $4,303,230.63 General Costs Output Costs 11,633,050,178 cu. ft. @ 31.3c. . . 3,649,988.74 Customer " 340,482 customers @ $2.20 757,870.47 Demand " 54,116,330 cu. ft. daily @ $26.07 .... 1,412,142.43 Reserve " 17,276,164 cu. ft. daily @ $26.14 . . 452,137.64 Surplus Net Earnings 619,632.62 Total Gross Income from Sale of all Gas $11,195,002.53 Average Price per JVI on Total Sales $0,962 NOTE: This Demand is one-half of sixty per cent, of the Old Business Demand, as the New Busi- ness Load Factor is assumed at sixty-eight per cent, instead of about thirty-four per cent, — the Old Business Load Factor. 53 The results may be summarized as follows: — Old Business: about thirty-nine millions of dollars invested on which six per cent, to interest and depreciation is earned by old busi- ness items of General, Output, Customer, Demand, and Reserve Costs and one-tenth of one per cent, earnings on this investment appear as a surplus of about thirty-six thousand dollars. New Business : about four million dollars new investment on which six per cent, to interest and depreciation is earned by new business items of Output, Customer, and Demand, while thirteen and three- tenths per cent, earnings on this new investment appear as a surplus of about five himdred and eighty-three thousand dollars made by selling about four bilhon cubic feet of gas at from thirty-five cents to one dollar and twenty-one cents per thousand, which averaged in price about fifty-five cents per thousand. And this is thirty-three and three-tenths cents below the apparent beire operating expenses vmder the "Amounts and Averages" system. Totalling the above, we get the following: — Table XXI. NEW EARNINGS UNDER "ADDITIONAL BUSINESS" SYSTEM. Investments* Fixed Charges. Net Earnings. Total Investment 1 Earnings. 1 Amounts. % Amounts. % Amounts. % 6.1 19.3 7.4 Old Business $38,969,168.08 82,338,150.08 6 836,160.85 0.1 $2,374,310.93 New Business 4,362,396.52 261,743.79 6 6 583,471.77 13.3 845,215.56 Total 843,331,564.60 $2,599 893.87 8619,632.62 1.4 $3,219,526.49 Compare the above results with the increment of but about $170,000 additional net earnings made under the "Amounts and Averages" System. 54 The net results obtained under the two systems are contrasted in the following table : — Table XXII. COMPARISON OF RESULTS FROM "AMOUNTS AND AVERAGES" SYSTEM AND FROM " ADDITIONAL BUSINESS" SYSTEM. "Amounts & Averages." ''Additional Business." Net Differences. 1 Amounts. % Amounts. % Amounts. % Increase in Investment none $4,362,396.52 11.1% $4,362,396.52 11.1 Increase in Daily Plant Capacity none 5,975,882 cu. ft. 10.1 5,975,882 cu. ft. 10.1 Increase in Sales cu. ft. 1,454,131,272 20 4,362,393,817 60 2,908,262,545 40 Increase in Gross Inc. $1,454,131.27 16.5 $2,399,316.60 27.2 $945,185.33 10.7 Increase in Expenses $1,283,997.91 19.9 $1,815,844.83 28.2 $531,846.92 8.3 Increase in Net Earnings $170,133 36 7.1 $583,471.77 24.5 $413,338.41 17.4 Decrease in Operating Exp. peril none $0,175 19.8 $0,175 19 8 Decrease in Margin to Capital Account perM $0,035 10.7 $0,072 22.1 $0,037 11.4 Decrease in Av. Price $0,035 2.8 $0,247 20.4 $0,212 17.6 In closing here that section of his paper which has to do specifically with " COSTS, " the author would again state that all figures which he has been obliged to use in presenting his methods of cost analysis have been used of necessity and simply with an illustrative purpose. He is not prepared to state that the "General Costs" is 48% of the total. It may bear almost any other ratio between, he believes, twenty-five per cent, and seventy-five per cent, of the total costs. Nor does he state thirty-two cents per thousand as a base line for the Cost varying with Output Only. It may be fifteen cents or fifty cents in specific instances. In fact, it is both of these figures in certain 55 cases embodied in the consolidated figures used. The same should be said of the Customer Cost, the Demand Cost, and the Reserve Cost. He is fully prepared to find them and to have others find them entirely different in specific instances. In fact, he is in no way here interested in the actual figures as presented, but his whole interest is centred on the solution of the problem they illustrate and to which they give tangible form. PART VI. PRINCIPLES OF RATE CONSTRUCTION. Passing now from the discussion of "Costs" per se, let us take up the question of "Rates" and consider the latter in the light of our findings in "Costs." We have before stated the following relations, which it should be incidentally said, are as apphcable in theory and principle to electric management as to gas management. This might be said of the entire "Additional Business" System. It is applicable to many forms of enterprise, the amounts and relative magnitudes thereof varjdng in each business, as indeed they would vary in any one business under different conditions and at different times. Table XXIII. ANALYSIS OF COSTS. Amounts. Per Unit % of Total Cost. Output Costs $2,284,559.48 $0,313 per M 27% Customer " 633,027.07 2.20 per Customer per Annum 7 Demand " 1,086,570.26 26.07 per M Demanded 12 Reserve " 452,137.64 26.14 per M Reserve 5 General " 4,303,230.63 49 Totals " 100% $8,759,525.08 From the above it is apparent under present conditions that 27% of the total costs varies, within limits, directly with the commercial output or sales at the rate of 31.3c. per thousand cubic feet. Like- wise 7% of the total present costs varies directly with the number of customers at the rate of $2.20 per customer per annum. Also 12% of the total present costs varies directly with the maximum daily de- mand, which costs $26.07 per annum per thousand cubic feet of maxi- mum day's demand. (Because of lack of data, as stated, no cogni- zance has been taken of the maximum momentary demand.) 57 This means that, if a customer pays less than 31.3c. per thousand for gas or less than $2.20 as an annual customer charge or less than $26.07 per annum per thousand of maximum day's demand, he is, in one or all of these items, imposing and causing direct and individ- ually apportionable costs in excess of his specific payments. Further- more, it means that, if the total of the charges to any customer falls short of his costs as Output + Customer + Demand, he is specifically causing a loss which must be made up by others. To charge any customer less in amount or items than above stated is therefore to knowingly carry him below the specific costs he occa- sions and to take his deficit out of some one else. The inequity of doing this is not open to question. The legality of so doing is open to question. It may be expedient so to do for sociological reasons, although this would in effect work probably against the best interests of the' commxmity as a whole, and consequently would be economically imdesirable for the best interests of the community as well as for those of the corporation. The items of "Reserve Capacity Costs" and "General Costs" are not specifically caused by any one or more of the customers. The "General Costs" do not increase or decrease, within limits, because of any normal change in " Sales," " Customers," or " Demand." They are a true "Readiness to Serve" Cost legitimately occasioned by the past and present general preparation to render service to the commu- nity. The corporation incurs them incidentally and of necessity in order to serve the community, and therefore for the benefit of the commimity. Of necessity and in equity the General Costs must be met by and obtained from the commimity. But how? Likewise with the "Reserve Capacity Costs." These are not oc- casioned directly by any of the customers, and are not in any way truly apportionable to the individual demands of any customer or customers for Output, Customer service, or Capacity demanded. The Total Capacity should be kept in excess of the Maximum De- manded Capacity to guard against discontinuance of the service be- cause of "breakdown" in any department with all its dangers and inconveniences to the community, to be ever in readiness to meet any extraordinary demands of the community such as are occasioned by imusually cold days, coal strikes, very dark days, and special cele- brations. There should also be a constant maintenance of Reserve 58 Capacity to the end that the plant be ever ready in advance of the constantly increasing demands of the community for additional ser- vice. But the necessity for Reserve Capacity cannot be directly traced to any one present customer or group of customers or, in fact, in full to all the customers. Its costs are not specifically or individually occasioned, but are legitimately incurred by the corporation for the general safety of the community, and to be ready to serve it to any extent within reason. To be sure, if the Demand grows at the ex- pense of the Reserve Capacity, some of the latter's costs become in- dividually apportionable, but only at a loss to the supposedly fair Reserve maintained for the whole commimity and which is not appor- tionable in any reasonable way to the three basic items of individually occasioned costs; namely, "Output Costs," "Customer Costs," and "Demand Costs." As the Reserve Capacity Costs are not individually occasioned by any customers or group of customers, but are legitimately incurred by the corporation for the general good of the service of the commu- nity, the conamunity or those taking the service should somehow meet these costs. Reserve Capacity Costs like General Costs are a true "Readiness to Serve" Cost incurred by the corporation for the general good of the community and its service. In equity and of necessity they must be met by their beneficiaries. But as they are not individually occasioned, and are therefore not specifically appor- tionable, the question of "How shall they be met or charged?" again rises with increased insistence. Referring again to Table XXIII. we see that we have a total annual cost of $8,759,525.08. Of this total $4,004,156.81 or 46%, under present conditions, is specifically occasioned and individually appor- tionable and chargeable as Output Costs (27%), Customer Costs (7%), and Demand Costs (12%). But $4,755,368.27, or 54% of the total costs under present conditions, is composed of 5% of the Total as Reserve Costs and 49% of the Total as General Costs. This $4,755,- 368.27 is a true "Readiness to Serve" Cost not attributable specifi- cally to any customer or customers, but necessarily annually incurred by the company for the general good of its service of the commimity. To find the most efficient and most expedient means of obtaining revenue to meet this constant "joint community" cost is one of the 59 most vital problems to-day facing every manager of a public service corporation who would best serve the public by his corporation and find a fair return to the latter from serving the public. Opinions and methods are doubtless as numerous as the thinkers on the problem plus those who think they know. Generally these thinkers may be divided into those whose "rates" would primarily tend to follow "cost" and those whose "rates" would be based more upon "worth" or "value of the service to the user." Between these extremes is a wide range to which may with truth be apphed the old Roman proverb : " In media res Veritas est." The advocate of having "rates" coincide with "costs" would ia the ideal have each customer pay an amoxmt equal to the costs he occasions, and "his share" of the joint costs, and in addition, if he be wise, a " profit " which in the aggregate shall be sufficient to stim- ulate the corporation to the most efficient degree in the further ser- vice of the public. If the economics of this method are soimd (and, in the opinion of the author, they are not), he can with ease and equity apportion the items of "Output," "Customer," and "Demand" in accordance with the above given analyses. But ia the "joint costs" (composed of "Reserve" and "General") he will be puzzled as to how to assess them or in any way relate them to the individual customer so that the rate or price to the latter coincide with "his share" of all costs. Recourse may be had to the analyst to present his figures ia the tm- sound terms of "Total Cost of Output," "Total Cost of Customers," and "Total Cost of Demand." Thereby the "Joint Costs" may be minimized or made almost to disappear. But the total itemized costs would not be sound becaxise they would be based on the totalled and averaged cost under the three headings instead of on the saving if each item of work were not done. This last method is one of the fundamental view-points of the "Additional Business" system of analysis here presented. To thus seek to eUmiaate the "joint costs" by concealing the "joint Readiness to Serve" function in part in each of the three direct variables (Output, Customer, and Demand) would be but to befog the true vision of the manager into his business without necessarily succeeding in apportioniag individual "rates" or prices in exact coincidence with individual "costs." Another method which would suggest itself to the mathematical 60 mind would be to apportion the present "joint costs" among the present specifically apportionable costs on the basis of the present interrelation of these latter to each other. Table XXIV. shows this done in amounts. Table XXIV. APPORTIONMENT OF JOINT COSTS. Specifically Apportionable Joint Costs. Total Resultants. Amounts. % Amounts. % Amounts. % Output Charge $2,284,559.48 57.2 82,720,070.65 57.2 $5,004,630.13 57.2 Customer Charge 633,027.07 15.9 756,103.56 15.9 1,389,130.63 15.9 Demand Charge 1,086,570.26 26.9 1,279,194.06 26.9 2,365,764.32 26.9 Totals . . $4,004,156.81 100.0 100.0 100.0 $4,755,368.27 $8,759,525.08 Table XXV. shows the resultant items of charge per unit. Table XXV. ITEMS OF CHARGE RESULTING FROM APPORTIONMENT OF "JOINT COSTS." Specific Costs. Joint Costs. Resultant Charges. Output (per M Sold) $0,313 $0,374 80.687 Customer (per Cus- tomer per Annum) 2.20 2.66 4.86 Demand (per M of Max. Daily Demand) . . . 26.07 30.72 56.79 The resultant charges are purely arbitrary, bear no relation to in- dividual costs, and become absolutely false the moment the condi- tions of the business or interrelations of Output, Customer, and De- mand change to any extent. This last is not the effect if the " Addi- tional Business" system is followed, because its apportionable costs 61 and charges are basic within wide limits. The above tables show merely one of an infinite variety of possible apportionments of the "Joint Costs" into the individual and specific costs. But no method occurs to the author whereby "Joint Costs" can therein be so appor- tioned as to make the individual customer's meet "his share" of these "Joint Costs" on purely an individual rate basis. This is for the simple reason that "Joint Costs" have nothing to do with any- thing except the general "Readiness to Serve" the community, and therefore cannot be in any way individually apportioned with any relation to individual costs exceptmg on the basis of the individual ability to pay them in connection with and for the service individually received. To develop a schedule which shall balance the books of the corporation by charging each and every customer only "his share" of the costs — that is, such costs as he occasions or such cost as would be saved, were he eliminated — would seem to be as impos- sible as perpetual motion. The other extreme of thought on the problem of rates is to charge each customer the maximum amount obtainable on the basis of the "worth" of the service to the individual without taking any cogni- zance of individual costs. This has been defined by some in railroad- ing as "charging what the trafiic wUl bear" and by others as "charg- ing the last cent the people will stand without rioting." "Charging what the traffic will bear" means "apportioning charges on the basis of capacity to meet them with, in so far as possi- ble, mutual profit to charger and chargee in view of the individual value and magnitude of the service rendered and received, but so that the resultant rates shall show the maximum net profit com- patible with the maximum volume of trade economically desirable." This is arrived at by basing the individual charge primarily on the individual "worth" or "value of the service to the individual." The author's personal belief is that under a fair administration of the principles of this system can the economic wants of a commimity be most equitably and most fully supplied by a public service corpora- tion. It is that system which works most for maximum equitable use of the service and maximum use of the investment in equipment. Consequently it can produce minimum average costs per imit of ser- vice. Therefore it is that system which, imder a rational system of goverimient supervision, would best work for minimum average 62 prices, — and it should always be borne in mind that the average 'price is the sole price in which the community as an economic imit is interested. The main reasons for this may be stated as follows : — A large percentage of the community, taking perhaps but a very small percentage of the total service supplied the community, would be interested in the utmost possible depression of the maximum price. A smaller percentage of the community, taking the larger percentage of the service rendered, woiild be interested in the utmost depression of the minimum price, because it may well be that, unless this is very low, they cannot at all use the service. This possible non-availability of the service would entail loss to them individually and to the whole commtmity as a community because of the inevita- bly resultant elevation of the average price. The community as a whole is really interested in the price times the volume of service, and that the product thereof be as low in aver- age price as possible. Any restriction to increase in the wholesale volume of service must act to retard the decrease in average price, and is therefore against the best interests of the community. But it should be borne in mind that because the numerical mass of a community may not imderstand this, it frequently becomes expe- dient to reduce the maximum price below that point set by equity and the best interests of the commimity. "Charging what the traffic will bear" or rather "not charging what the traffic should not individually and collectively bear over cost" might seem to be entirely unjustifiable in principle and precedent if appUed to the operation of a public service corporation. In these situations the idea seems to prevail that prices should either be aver- aged as under the ridiculous uniform rate by meter or per imit or should follow some impossible cost curve. Every financier, merchant, and professional man generally sells his goods or services for what he can get for them (usually over cost) under the economic conditions pertaining at the time and place of sale. " In the open market things are sold on the basis of what they are worth to the buyer and not on the basis of what they cost the seller." * ♦"Some Economic Relations between Public Lighting Corporations and the Public," by W. H. Gardiner, Jr., read at the Twenty-second Annual Meeting of the Ohio Gas Light Association. 63 Innumerable instances of the universal application of this principle in general business could be cited, but special reference will be made only to governmental methods of charging because of the authority they carry with them and to railroad rates because of their economic similarity to desirable Ughting rates. The real basis of postal rates, as for classes, for weights, and for distance, takes practically no cognizance of individual, class, weight, or distance costs. The Postal Department seems to seek to charge such rates as will not imdesirably restrict use of the mails, — such rates as can be met by different classes of matter and such rates as will come near meeting the total costs of the business. If two cents for the first ounce fairly meets the cost of handhng a piece of first class mail matter, does two cents per additional ounce bear any close relation to the additional cost of handling it, should it weigh more than one ounce? Does second class mail matter from publishers at one cent per pound cost to handle only one-thirty-second of the cost of handling first-class mail matter per poimd, and does second class mail matter from the public at one cent for each four oimces cost four times as much to handle per pound as does pubhshers' second class mail matter ? If one cent per pound meets the cost of handling second class mail matter, is not one cent for each two ounces or eight times as much an excessive charge for third class mail matter ? With a imiform price of two cents per ounce, what are the relative costs of handling local or "drop" letters and transcontinental letters? Without entering into specific analyses and arguments, it would seem fair to conclude that some classes of mail matter are subsidized or supported by others, the former being incapable of pajong their specific costs and "their share" of the "joint costs" and the latter being capable of paying more than their total costs without the high charge above cost unduly restricting traffic. The reasons for a uniform rate regardless of distance are essentially the same as make the uniform street car-fare superior to the per- nicious "zone system" in vogue in English Mxmicipal tramways. There are sufficient people whom it pays to indulge in the luxury of mailing letters to be delivered around the corner to support a large volume of long distance mail which would be unduly restricted if it 64 had to pay a rate based on distance as well as weight. In street rail- roading it is the man who indulges in the luxury of riding a few blocks for five cents who enables the company to carry the clerk and me- chanic to their homes five miles out of town for five cents. Postal rates are simply based on "what the traffic will bear," or rather "not charging what the traffic should not bear," and they are thus adjusted for the good of the service. Another, and perhaps the most thoroughly indorsed, if least under- stood, instance of "not charging what the traffic will not bear" is our system of taxation. Take "A" and "B," two citizens each using civic and govern- mental service to about the same extent as individuals. "A" is worth one milUon dollars in personal property, and pays his poll tax and his taxes on his personal property. " B " is an equally active member of the community, but has no property and pays simply his poll tax. In the good city of Boston, the most expensively run city in the world, the average civic cost per capita per annimi is over fifty dollars. Towards this "A" contributes sixteen thousand and two dollars or fifteen thousand nine hundred fifty-two dollars more than the average cost per capita. " B," on the other hand, contributes but two dollars or forty-eight dollars less than the average cost per capita, and three hundred and thirty-two "B's" are subsidized each to the extent of forty-eight dollars by this one "A." Now why is this so? "A" does not require but very httle, if any, more than B, yet he pays eight thousand times as much as "B." These charges are made in this manner, simply because "A" can afford to pay six- teen thousand and two doUars a year to civic expenses, while all the " B's ' ' cannot afford to pay fifty doUars each. No one is charged what he caimot afford to pay. Another similar instance of this is the Income Tax, in effect in England, and most seriously considered for the United States. This system of taxation calls for the payment in taxes of a considerable percentage on the excess individual income over and above a mini- mum income, which minimimi income is above the average income of the conmiimity, and therefore above the average income of the masses. This is simply another instance of putting the burden where it can be most easily borne. 66 Likewise the inheritance tax, which in England yields an annual income of many miUions, is levied not according to the governmental cost of probating and transferring property to heirs, but as an equi- table charge which the heirs may well forego. They can stand it, for they are merely foregoing for the pubhc good that which they have not got. From these examples it would seem that governmental theory and practice indorse the propriety of " charging what the traffic will bear " or "not charging what the traffic will not bear." Governmental ac- tion seems to have recognized the application of this system, first, as a proper one to use both from the collective public and individual's point of view, and, second, as that system which in instances seems most conducive to the welfare of the community. That "charging what the traffic will bear" is no new principle or recent device in public service work is shown by the following quota- tion from Adam Smith's " Wealth of Nations, " written in 1775. On page 326, Book V. (McCullock's edition), he says regarding road toUs: "When the toU upon carriages of luxury, post-chaises, etc., is made somewhat higher in proportion to their weight than upon carriages of necessary use, such as carts, wagons, etc., the indolence and van- ity of the rich is made to contribute in a very easy manner to the relief of the poor by rendering cheaper the transportation of heavy goods to all the different parts of the country. For the modern application of this system consider it in connection with present American railroad practice based on " not charging what the traffic will not bear," and contrast the result with those obtained on the Prussian government railroads where the endeavor has been made to have "rates" parallel "costs." For the purposes of this consideration, American freight may be divided into say three major classes. First: Low grade freight, which averages to pay but little more than its bare individual and specific costs, because it cannot afford to pay more. Second: Medium grade freight, which pays its individual costs and what we will call an average excess, available to meet the general costs. Third: High grade freight, which pays its individual costs and an excess over these individually caused and apportionable costs so great 6& that it forms not only the balance of general costs unmet by the lower grades of freight, but also furnishes all of whatever net profit there may be over total costs. Each grade of freight pays what it is worth to its shippers to have it transported, and the aggregate receipts meet the total costs and may 3aeld a net return on the business. But assume that no freight is charged over its individual costs and an arbitrary and uniform apportionment of the general costs. High grade freight would be carried at much lower rates than it can well afford to pay. Medium grade freight rates would, let us say, remain unchanged. But low grade freight would have to pay rates aggregating its individual costs plus the aggregate discount- made to the high grade freight. As a large percentage of the low gi'ade freight simply could not stand this rate, it would not be shipped. The greater volume of trade, on which rests the prosperity of the community and railroad alike, is low grade, low rate, long haul freight. Wipe out a large per- centage of this low grade freight, and you would have the railroad industrial condition now brought about by the Government Rail- roads of Germany. That conditions of high average rates, low traffic densities, and great concentration in smaller sectional industrial communities would result is evident because average costs would increase with the loss of much of the low grade freight. Because of this increase in average costs, and consequently in rates, the volume of average trade would tend to decrease, entailing a still higher movement of rates and decrease in traffic density or use by the community of the equipment. Likewise sectional trade barriers would arise through increase of the cost and rates of long haul freight which is now properly made possible at low rates by business now done at higher rates to the mutual advantage of long and short hauls, high and low grade freights. This means simply that in American freight rates based on the individual value or worth of the service the necessities of the masses, sociologically and industrially, are best served, in fact often made possible, by a reasonable charge where this can be met, — say on com-» parative luxuries. In the United States the population density per square mile and 67 per mile of railroad is low as compared with Germany, and yet our traffic density is much higher than is hers. This means that in spite of a comparatively sparse population our railroads are able to be of greater use to us than are the government railroads of Germany to her inhabitants. That they have served us better in the matter of reducing prices to the lowest amounts is well illustrated by the following table, copied from page ninety-four of Hugo R. Meyer's excellent work en- titled " Government Regulation of Railroad Rates" : — Table XXVI. AVERAGE RECEIPTS PER TON-MILE. Railways of Prussia. Railways of tlie United States. 1 Cents. Per Cent. Cents. Per Cent. 1880 .... 1.498 100 1.232 100 1890 .... 1.315 87.8 0.941 76.5 1899 .... 1.278 85.3 0.725 58.3 INDEX OF PRICES. Qermany, United States. Per Cent. Per Cent. 1880 .... 100 100 1890 .... 98. 86.7 1899 .... 82.4 75.2 Since 1899 the average receipts per ton-mile of American Railroads have risen to something imder eight mills, which rise is attributed to the recent increase in the costs of material and labor brought about by the labor unions. The economic factors of railroading, the Postal Service, etc., are much more similar to those of the public lighting business than would at first thought seem to be the case, — especially if each business or situation is viewed primarily from its relations to its markets or the public rather than from the physical or corporation view points. 68 A constructive line of argument appl3dng the railroad principles above outlined to the public lighting business might therefore be of much interest. It would seem that American railroads have out- distanced others better situated by breaking loss from individual "costs" and, under class, place, weight, volume, quantity, and dis- tance distinctions, making rates on the basis of "the value of the service to the user," the basic limits being the addUional costs to the railroads of rendering the additional service. In the Postal Service, a more radical stand would seem to have been taken in that certain classes of traffic are sought at rates evidently far below the additional cost which handling them must impose on the Service, it apparently being thought that it is proper and expedient to tax others over their costs in order to meet at least ia part the deficits of this business car- ried at a net loss for the good of the pubUc. Our theory of taxation goes even further, and bases taxes practically entirely on the supposed individual ability to pay. But while the economic welfare of the community might best be served by the sweeping substitution of rates based entirely " on what the traffic should bear" instead of on average or individual costs, sociological reasons would render this extreme action very inexpe- dient, even though it be for the best interests of the conmiimity. In fact, expediency, as indicated by the mistaken desires of the mass of the pubUc, would be best served by that rate system which least well serves the pubUc, — the uniform rate per unit. Between these extremes of sociological expediency and economic desirability an acceptable mean must be arrived at. The only consideration which should be given to the uniform rate per unit should be as to means of doing away with it, remembering that its "average costs" bear no true relation to the community or the individual costs. The system of "charging what the traffic should bear," while it would be best for the community if equitably applied, can be con- sidered only as a goal attainable when lighting rates can be made with the same freedom from costs that to-day pertains in postal rates. To so arrange rates that each individual shall pay all and only all his individual costs plus a fair profit is both economically inexpedi- ent and practically impossible, if the total receipts must equal or exceed the total costs. Railroad rates and the regulation thereof have repeatedly and in many countries shown that rate schedules 69 seeking to parallel costs as analyzed and apportioned are inferior and prohibitive to the economic welfare of the community. Accurate analyses of costs show that it is impossible to make rates on any system which will make every customer pay all the costs for which he individually is responsible and no more and yet which shall, from only the total receipts from customers, meet all costs and possibly show a net profit. This is for the simple reason that more or less than half of all the costs are "joint costs" incurred in the general main- tenance of the "Readiness to Serve" equipment and facilities called for by the commimity, while perhaps less than half of all the costs are individually and specifically determinable and apportionable. Drawing the line between sociological expediency and economic desirability, it would seem fair that each customer pay at least those costs which he occasions — those costs which would forthwith be saved, were he eliminated — rather than that he be a pensioner on his neighbor for even these costs, especially as the neighbor and the coiu-ts might take action, should they imderstand the situation. With the individually apportionable cost thus settled we are still confronted with the question: "How shall joint costs be met?" We have seen that "joint costs" cannot be individually appor- tioned in any way so that the resultant individual rate charges bear any specific relation to the individual costs. "Joint costs" may be apportioned in any one of an infinite variety of ways by arbitrarily including them in various amounts in the Output, Customer, and Demand charges as shown in Tables XXIV. and XXV. But such arbitrary apportionments can neither approximate the individual costs as composed of the specific individual's costs plus " his share" of the "joint costs," nor will any such arbitrary apportionments be of necessity unfair, provided they be reasonable. Either the Output, Customer, or Demand charges may with perhaps equal equity bear the greater part of the necessary burden of "joint costs." The main object in apportioning the "joint costs" for which prac- tically the whole community is responsible should be to so place them that the community or rather the customers can meet them with the least inconvenience to themselves and that "joint costs" be so placed as to least affect the extension or use of the service and the reduc- tion in the average price thereof. To do this means to apportion "joint costs" so as to get revenue to meet them from those sources 70 which can most readily yield it, — in other words, where the group, class, or individual "value of the service" will stand it with the least burden to all concerned. Stated in other terms, we would say that "joint costs should be charged where the market will most easily bear them, but not where the market should not fairly bear them." This must be fairly done, and can thus be done only by apportioning "joint costs" on the basis of the "value of the service," provided always that each resultant rate or price for service be rea- sonable, rational, equitable, expedient, and desirable. To attain this end, the problem must be approached from the points of view both of "costs" and of "worth" or value. Cost must be analyzed to determine and apportion all individually variable and apportionable costs, and to extract from the total and set aside "joint costs." Worth or individual value must be analyzed to apportion in the conmiunity the "joint cost" in order to obtain revenue to meet it in the way least onerous to the community, the individual, and the service. Rates built upon a system developed from these two view-points should have as their bases the individually caused costs and as their maxima the limits imposed by reasonableness, equity, and expedi- ency. The resultant rates should be such that in so far as possible they show in each individual case an equal profit or benefit to both customer and corporation. They should further yield collectively a profit to the corporation equal to the benefit or saving it renders the coEomunity in serving it. But this last condition should be ar- rived at in the full light both of the sociological expediencies of the situation and of the economic functions thereof. Some of the principles of necessity underlying such a relation be- tween the pubUc and the public Hghting corporation have been else- where outlined by the author.* It is his hope to in the near future develop some of the methods under which they may be apphed. Suffice it to say here that a method of regulation is perfectly prac- ticable which method will aUow of absolute freedom as between public service corporations and each individual customer and yet which wiU so restrict both the corporation and customer that the aggregate * " Some Economic Relations between Public Lighting Corporations and the Public," read by W. H. Gardiner, Jr., at the Twenty-second Annual Meeting of the Ohio Gas Light Association. 71 of all individual bargains shall be profitable to both in a predeter- mined ratio. A study of the several items, relations, or determinants of a Wright Demand rate or a Doherty rate with the specifically determinable and indeterminable costs clearly in mind would, the author believes, be illuminating as to the reasons controlling the magnitude of their several rate items. The Doherty Rate, the Wright Demand System, and, within much more narrow limits, the Quantity Increment System, can be and, at least in part, might seem to have been developed in instances to meet the individual rate conditions above suggested, but not the aggregate relations as between community and corporation. Reviewing the various matters considered above, the author is forced to the conclusion that, first, for the benefit of each community served, as a community and for the benefit of the individual parts thereof, and, second, of each public service corporation, it is the duty of every pubUc service corporation, in so far as possible, to determine its costs not only as at present, but the costs at which it may take on additional business without loss. Next, that a rate system be de- veloped incorporating these costs, but having such latitude and flexi- bihty that legitimate costs individually indeterminable, or "joint costs, " may be placed where they will be of the Ughtest burden to the community and the corporation. To this end " the value of the service" must be analyzed. He further does not doubt that a System of charging for gas or electricity which would place with scrupulous care all determinable charges where their costs occur, and charge all joint costs equitably and imder standard conditions, where they can be most easUy carried, acting in the least restraint on trade and for the rapid increase in service and decrease in average rate, will, because the indeterminates are so placed, be decried by many as unjust and discriminative. The author, however, submits it as his opinion formed for cause, that such a rate system, honestly developed and impartially appMed, will place "Rate Charges" far more accurately and justly where costs originate than now does the time-honored and extremely unjust system of charg- ing simply so much per unit sold. It would indeed be hard to conceive an apparently justifiable system which is more imjust, more stupid, and more detrimental to the best interests of the public and the com- 72 pany alike. A real analysis of it shows that, with almost Satanic ingenuity, it assesses charges where costs do not occur, it charges most where the market will bear the least, and so in many ways acts for the greatest restraint of trade and consequent retention of high average costs and prices and low earnings. PART VII. CONCLUSIONS. The author can but suggest that consideration be given to the formulation of a rate system based on real costs. All individually determinable costs should be individually met as they originate; all true and indeterminable costs, as they are non-individual in then- nature, and are distinctly communistic, should be met communistically in that manner which will be the least prejudicial to the best interests of the conamunity and corporation. In fact, assimiing that the community is equitably taxed, and that the use of the service is general, the author is not prepared to state that all true indeterminate or joint costs which the company has to incur should not be met by direct payment from the income of the municipality to the company. Joint costs are incurred for the general good of the community. If met from the general purse of the commu- nity, individuals would be thereby relieved of directly bearing them, and would have only to meet the costs they individually impose. As these are but a fraction of the whole costs incurred, lower total costs to the community per imit of service and broader service of the com- munity might ensue. But this would be absolutely contrary to the policy from which franchise taxes emanate. In practice what the conununity and corporation really want for the best good of all is that system of charging which wiU most truly and rapidly make for maximum sales or utiUty of the service to the community, minimum average price and earnings in proportion to the service rendered or business done. Such a system of charging should be developed to the end of best meeting the economic demands, present and possible, of the situation and should aim at becoming the system economically most desirable from the mutual points of view of both the public and the corpora- tion. But it must be worked out in the light of the sociological ex- pediency of the situation. It must be simple, reasonable, equitable, and flexible. Sociological expediency must take precedence over economic desirability, but the latter must be the end in mind, while 74 the sacrifice made to the former should, by analyses, be in constantly accessible form. The formulation of such a system of charging the author must now leave to the lighting fraternity, as he is forced to acknowledge him- self now incompetent to give it. Discussion to this end should take no cognizance of any specific figure used in this paper, as all figm-es herein have been used only in an illustrative manner. It should, in the opinion of the author, be at the outset strictly confined to the following general considerations : 1st. Economic DesirabiUty. a. From the view-point of the Community. b. From the view-point of the Corporation. c. From the view-points of both. 2d. Sociological Expediency. a. From the view-point of the Community. b. From the view-point of the Corporation. c. From the view-points of both. 3d. Equity. a. To the Community collectively. b. To the individual customer. c. To the Corporation. 4th. Simplicity and Uniformity. 5th. Reasonableness. 6th. Security to the Corporation. 7th. Legahty not only in the light of present court opinions, but also in the light of such opinions as might reasonably be expected from a true imderstanding of Rates by the Courts. In general or specific terms this discussion on Rates can be con- ducted only after the definition of and agreement upon, first, the principles and items of Cost; second, the principles and items of Worth; and, third, the relation of Cost to Worth and Worth to Cost in the pubHc lighting business. Then and only then can a sound dis- cussion on Rates ensue. This latter must further be conducted with a full knowledge of the Political Economy of Production, Distribution, Consumption, and Salesmanship. 75 Furthermore, the author has, rightly or wrongly, formed the opin- ion that those working on this problem seem individually to approach it each mainly from only one of several equally important view- points. Some appear to lay emphasis almost entirely on what might be called individual equity; that is, they want, in so far as possible, to adhere strictly to individual costs. Others approach the problem apparently only for the corporation's immediate gain without much regard to the ultimate interests of both pubhc and corporation. Still others seem to almost exclusively consider present pubhc or sociological expediency, thereby unduly shghting pubhc and corpo- rate economic desu'abihty and individual equity. A just balance between these contending aspects must be maintained before any sound or permanent solution to the problem can be arrived at. In closing, the author wishes to express his indebtedness to Mr. Arthur Wright, Mr. H. L. Doherty, Mr. Arthur WiUiams, Mr. R. S. Hale, Mr. Paul Doty, Mr. F. W. Frueauff, and many other managers and economists who, by their writings and discussions, have given him what knowledge he has of the problems of "Costs and Rates." 2Si! S±1!J' =! "r^rTiSaiaE ,