REPORT TO THE Committee on Gas, Oil and Electric Light ON THE Investigation OF THE COMMONWEALTH -EDISON COMPANY Chicago — May 1913 0 ^ 2 1 - COMMITTEE ON GAS, OIL AND ELECTRIC LIGHT CITY COUNCIL — — ' OF THE ■ =- — — - CITY OF CHICAGO Ald. Lewis D. Sitts, Chairman Ald. Jos. F. Ryan Ald. Theodore K. Long Ald. Chas. E. Merriam Ald. Eugene Block Ald. Frank J. Vavricek Ald. Albert W. Beilfuss Ald. Stanley S. Walkowiak Ald. Martin J. Healy Ald. James B. Bowler Ald. James E. Burns Ald. John Haderlein Ald. Charles Twigg Ald. Felix B. Janovsky Ald. James A. Kearns Ald. George A. Bradshaw Ald. Jacob A. Hey Digitized by the Internet Archive in 2017 with funding from University of Illinois Urbana-Champaign Alternates https://archive.org/details/reportoninvestig00chic_0 TABLE OF CONTENTS. PAGE. Letter of Transmittal 3 Preface 4 Synopsis 5 Recommendations 9 Historical 9 Valuation, General Discussion 23 Valuation, Basis of 24 Valuation, Summary of 1908 Appraisal 28 Valuation, Revised, as of June 30th, 1911 50 Overhead Charges 29 Brokerage 32 Paving 32 Depreciation, Accrued * 35 Depreciation, Annual Allowance for 64 Sundry Investments 37 Intangible Values 38 Working Capital 46 Revenue 50 Expense, Coal 56 Expense, Purchased Power 56 Expense, Other 57 Expense, Allowance for Depreciation 64 /Rate of Return 68 Rate of Return, Chicago Public Utilities 72 Rates, Some Principles Observed in Making 74 Rates, in Other Cities ' 95 Rates, History of Maximum 100 Railway and Bulk Supply Business 77 Wholesale Light and Power 91 PAGE. Municipal Lighting ....92-93 Retail Lighting . v . . * 102 Retail Power 105 Rate, Possible Reductions in 1912 106 Rate Reductions. Future 107 APPENDIX— Electrical Generation and Distribution 110 Electrical Units 110 Maximum Demand Table Ill Testing of Meters 112 Method of Computing Bills 112 LIST OF DIAGRAMS. DIAGRAM. PAGE. 1. Increase in Total Investment Contrasted with Investment Neces- sary to Produce $1.00 Gross or Net Revenue 17 2. Growth of Income and Variation in Comparative Ratio. 18 3. Decrease of Investment and Income per Customer, and Growth of Earnings and Number of Customers 19 4. Growth in Connected Load 20 5. Increase in Total Output and Current Sold for Railway, Light and Power Purposes 21 6. Curves Showing Kilowatt Output for the Average Day of Each Year Since 1900 22 7. Increase in Income From Various Classes of Business 53 8. Decrease in Income per Unit of Connected Load 54 9. Decrease in Income per Kilowatt Hour Sold 55 10. Return on Stock from Varying Allowances on Total Investment. . 70 11. Rate of Return in Past on Capital Stock and Plant Investment. . 73 12. Comparative Loads — New York — Chicago 78 13. Comparative Loads — Boston — Chicago 79 14. Annual Load Factors 80 15. Maximum System Load — Year 1911 81 16. Station Load Distribution — Year 1911 81 17. Summer Load Curve — Year 1911 82 18. Rates for Certain Chicago Installations 96 19. Graphic Comparison of Several Large Companies 98 - 20. Effect of Past Rate Reductions on Certain Installations 101 21. Results of Increased Lamp Efficiency and Rate Reductions 103 22. Revenue and Cost of Service for Average Retail Customers 104 23. Increase in Rate of Return and Surplus with Decreasing Rates. . 107 24. Increase in Economy of Fuel Consumption 108 25. Elements of a Large Electric System and Losses of Energy in Various Parts 111-A V $ LIST OF TABLES. TABLE. PAGE. 1 . 2 . 3. 4. 5. 6 . / . 8 . 9. 10 . 11 . 12 . 13. 14. 15. 16. 17. 18. 19. 20 . Statistics on Basis of Revised Figures 8 Income Statements and Balance Sheets, Chicago Edison Co 13 and 14 Income Statements and Balance Sheets, Commonwealth Electric Co 15 Income Statements and Balance Sheets, Commonwealth Edison Co 16 Comparative Data Based on Companies’ Published Statements. . . 16a Working Capital 48 Summary of Investment 49 Comparison of Income in Dollars and Sales in Kilowatt Hours for Year 1911 51 Comparison of Income in Dollars and Sales in Kilowatt Hours for Year 1912 52 Total Expense (Exclusive of Depreciation) for 1911 60 and 61 Total Expense (Exclusive of Depreciation) for 1912 62 and 63 Depreciation on Various Classes of Investment 67 Depreciation Allowance for the Year 1911 68 Comparison of Chicago Public Utilities 71 Railway and Bulk Supply Expense (Exclusive of Deprecia- tion) 84 and 85 Summary of Light and Power by Rate Schedules 88 Expense Other than Railway and Bulk Supply (Exclusive of Depreciation) 89 and 90 Light and Power Rates in Other Cities 95 Statistical Comparison of Several Large Companies 97 Rates in Other Cities on a Comparative Basis 99 Commonwealth Edison Maximum Rate Investigation Chicago,. May 14, 1913. To the Committee on Gas, Oil and Electric Light of the City Council of the City of Chicago, Hon. Lewis D. Sitts, Chairman. Gentlemen : We respectfully submit herewith, in accordance with your Com- mittee's request of August 27, 1912, a report upon the results of an investigation of the Commonwealth Edison Company which has been carried on, under the direction of the City Electrician, by A. C. King, Engineering Expert for the Department of Electricity, and C. B. Willard, Expert Accountant for the City Comptroller. The object of the investigation has been to study the accounts, records and operation of this company for the purpose of furnishing your Committee with all information necessary to fix fair and rea- sonable maximum electric rates for a period not to exceed five years from the date of acceptance of the new ordinance prescribing such rates. This is a means of regulation authorized by an Act of the General Assembly of the State of Illinois, approved May 18, 1905, and in accordance with the terms of an ordinance passed by the City Council on March 23, 1908. Throughout this investigation the Company has assisted and co-operated in the work whenever requested, and we take this op- portunity of acknowledging the courtesy and consideration ex- tended by the Company and its employes to the City’s representa- tives. The recommendations that are offered follow this letter, sum- marizing the results of the investigation, in order that the Commit- tee may readily refer thereto in its consideration of the subject matter of the report. Very respectfully, Ray Palmer, City Electrician. John E. Traeger, City Comptroller. REPORT ON MAXIMUM RATES OF THE COMMONWEALTH EDISON COMPANY. Preface : The City of Chicago has the right to regulate the Common- wealth Edison Company insofar as the establishing of its max- imum rates for electric light and power is concerned. In order to report upon what are “fair maximum rates” for the different classes of service, which means efficient service to the citizens and a rea- sonable return to the Company on its valuation, it is necessary first to appraise the Company’s property, and second to use the appraisal valuation in connection with book values of the Com- pany, in determining the proper distribution of income and ex- penses. As it was impossible for an appraisal to be made by the City in this investigation, the H. M. Byllesby appraisal as of June 1st, 1908, was used. Basis of Investigation : While neither the quantities nor unit costs of the appraisal could be checked they were used with some modifications and ad- justments. This assumption was made necessary as nearly all old books and records of the Commonwealth Electric and Chi- cago Edison Companies were destroyed some time after the ap- praisal had been completed (although they were available for the City’s last investigation conducted prior to the passage of the ordinance of March 23, 1908). A new appraisal, which has been made by the Byllesby Com- pany during the last year, was not completed so that it could be used for this report. Our valuation, therefore, was obtained by ad- justments of the 1908 appraisal as shown in detail later with the proper additions and reductions to June 30, 1911, which date is considered as representing a fair average investment for the year 1911. The accounts of the Commonwealth Edison Company from Sep- tember 17th, 1907 (the date of consolidation to which the inven- tory was adjusted on the books), to December 31st, 1911, were ex- amined in more than the preliminary manner originally intended. Income and expense statements for the year 1912 recently avail- able are also presented in the body of the report with such adjustments as developed in the audit of the preceding year. The figures for the year 1911 were used as the basis of this report and a detailed audit made of the revenue and expenses. Quality of Service : The “quality of service” factor has been given considerable study in this report, as it is believed that a monopolistic public utility company, such as the Commonwealth Edison Company is at the present time, is in a position to give the highest grade of ser- vice to its customers at minimum rates, after paying reasonable 5 returns on the investment, when properly managed within itself and regulated by the municipality which it serves. If a public utility company is well managed, as this one has been, a maximum “quality of service” may mean an increased fixed charge or operating cost, or both, and consequently less avail- able for return on the investment and for surplus. Surplus : Under normal conditions if the service given as a whole is of the highest grade and satisfactory, and the per cent return al- lowed on the investment is constant, the important varying factor in each year’s business is the surplus. When the income increases in greater proportion than the proper yearly operating charges and expenses, including depreciation, the surplus will be greater for the year. There should be a fixed minimum surplus carried by the Company to assure a fair return on the investment during the worst years of operation, but when the surplus is increased mate- rially over this amount the income should be reduced by this ex- cess through the reduction of rates. This is a fair principle to ap- ply, as the investor is protected to a reasonable extent on his in- vestment ahd the consumer is benefited by the reduction of rates applied to keep the surplus near a fixed amount or proportional part of the Company’s actual investment. Reduction of Rates : Reductions of maximum lighting rates of the Commonwealth Edison Company, during the last five years, from 16 cents to 10 cents primary, and 10 cents to 5 cents secondary, have been due to the following reasons : The installation of larger, more efficient and cheaper gen- erating stations and distributing systems. The acquisition of large wholesale customers. The increase in the number of consumers and the connected load. The more extended use of electricity by the general public. These conditions are largely the result of the progressive pol- icy of the Company. SYNOPSIS. Monopoly : The Commonwealth Edison Company, which is the result of a consolidation of many competing electric companies and the de- velopment of this consolidation into a well organized and efficient public utility, is a monopoly at the present time in the electric light and power supply field in Chicago. When properly regulated by the municipal or state government, a monopoly is ordinarily capable of furnishing the maximum quality of service at minimum rates. Valuation : Two appraisals of the Company’s property have been made by experts employed by the Company during the past five years, 6 the first of which was for the purpose of capitalization. While the City has had no connection with these appraisals, it was neces- sary to use the figures of the 1908 appraisal for the purpose of this report. Reductions of these valuations, as of Sept. 17th, 1907, on account of adjustments of the following items, were made: Overhead charges, Brokerage, Paving over conduit not paid for by the Company, Intangible values, Accrued depreciation. Valuation of the property as of June 30th, 1911, was increased on account of adjustments of the following items : Interest carrying charges on construction between date of appraisal and June 30th, 1911 ; capitalization of investment which had been charged to ex- pense. The June 30th, 1911, valuation was reduced on account of the rejection of certain unused property. The final summary of valuation as of June 30th, 1911, of the useful physical property is $52,200,189.00 ; intangible value and free wiring, $3,247,679.00, and working capital, $2,535,690.00, a total of $57,983,558.00. Revenue : Revenue for the year 1911 was increased on account of retro- active contracts with railway customers and other minor ad- justments. The total as revised amounted to $14,038,115.00. Expense : Adjustments were made in the amounts charged to coal shrink- age and storage, and power purchased from other electric com- panies. The construction items charged to expense during the year were taken from expense and included in capital. These with minor changes also made, resulted in a total expense for the year 1911 of $7,007,980.00. Depreciation : An allowance for depreciation was calculated on a 3 per cent sinking fund basis at $1,987,252.00 from the revised figures of the original cost, estimated life and salvage value of all depreciable property, which amounted to 3.63 per cent of the value new. Rate of Return : A rate of return of 7 per cent on the present value as deter- mined for rate purposes is considered fair and reasonable. Surplus : Investment, revenue, expense and depreciation allowance for the year 1912 were revised on a similar basis as for the year 1911. The surplus earnings above a 7 per cent return on the investment, after all proper expenses and allowances for depreciation, amounted to $983,000.00 for the year 1911 and $1,013,000.00 for the year 1912. Revenue from Various Classes of Business : A study was made of the income from the various classes of 7 service furnished by the Company, including railway and bulk sup- ply, wholesale lighting and power, street lighting, retail lighting and retail power, as well as the various contracts pertaining to the above. While in some cases it was found that the return on the necessary investment was somewhat below 7 per cent, it is not con- sidered that an unfair burden is thereby placed upon the other classes of customers. A direct apportionment of the investment necessary for fur- nishing retail light and power is impossible, but calculations made from such data as were available indicate that the return from this business exceeded the total expense, including a 7 per cent return on the investment. It is therefore recommended that revisions be made on these rate schedules. Certain rebates and special classifi- cations of customers now in force are considered unjustly discrim- inatory and should be abolished. Table No. 1 sets forth statistics on the basis of the revised fig- ares used in this report: 8 . © as 'M £ aasSsSgS 8gg8§£g~ gS&- £ ’ ajio’sj^oj^cgS^ ssisissse 88 ! -^ Ift 00 ,og £s* * «9 ■P S «2 i*S£ S«& 0 - i! H p. S « 2P-w £ 5 .S e? ■ s z: ^ to W ~ v ; >?ji’£ «So£ $ bag 5?P.S > ^o«5 ' a 3 'o° X o i O) &£ 3 pi m 4) OJ « a ca 02 k O -m O U 02 588 a £J ll So S *H 5 O/ OP-i a s x a 3 S v . 2 ? 5 05 55 o ^ i? 2 “ ‘| '3 '3 « ^POOS* rn-o *>*?! o « 8 £383 X> rjj CO r-J go IQ 00 oi w £ § i£S§ a « !88i £ . MS CO 05 si 8® > O M £ . Mg « § 8 §8 « 8 £ MS GO ^ 8*5 32 3< 6 2 M . s m 'M II Mi ^M • J? a> O > o ci a M £ 'O il § II P 88 fe8 £ M 11812 coVSS’ 8 - £ £ M M «V88 £ £ M M 888 *ss §|*»- ir .ms II 'a a , . II c3 H o • 25 2 joflft COPP Td rH 0 a a) |.SSH ai +J d ® m m S a 4) a> 9 % > > • ® a fl OKhh O 02 ca ca ajo C3 « O 3 2 1 sj.S S * 55 cs II S £ |W"I a u a II 03 02 « O 5.0 boM &o flSa © ® o> a > a oMC5 9 RECOMMENDATIONS. It is recommended : 1. That if future regulation is conducted on the present basis, m the interest of economy and fairness, the public authorities be represented on any appraisal boards appointed for the purpose of determining the value of the Commonwealth Edison Company’s property for taxation, capitalization, rate regulation or sale. 2. To best serve the interests of the consumer and to fairly treat all parties concerned, that a complaint and service bureau be established to handle complaints of service and questions of charges. This bureau can be so organized as to be able to co-operate with the different departments interested, in compiling the necessary data for future rate regulation and service supervision. This bureau, together with the divisions of electrical inspec- tion and fire prevention, could study such problems as the over- loading of lighting circuits with domestic power consuming appli- ances and the resulting hazards. 3. That a reduction in retail rates be now made, which can be applied in one or more of the following ways : (a) The lighting rate be 10 cents per kilowatt hour for the first hour’s daily use of maximum demand, 5 cents for the sec- ond and 3 cents for all excess, placing retail light and power on the same schedule, and eliminating investment in extra maximum de- mand meters and wattmeters. ( b ) A reduction in the primary rate, both light and power, below a 10 cent maximum. ( c ) A reduction in the secondary rate, both light and power, below a 5 cent maximum. ( d ) A reduction in the number of hours daily use of max- imum demand before secondary rate is effective. It is believed that recommendation (a) offers the greatest num- ber of advantages. 4. That maximum demand meters be not installed in future for retail light and power, except in cases where they appear neces- sary for statistical purposes, but that the maximum demand be determined from present data and statistics revised from time to time as conditions demand. 5. That special discounts now granted to the following classes be eliminated : drug stores distributing advertising, company em- ployes, customers having more than one premises, hall lighting in apartment buildings, and charitable and semi-charitable organiza- tions. HISTORICAL. The Commonwealth Edison Company is an Illinois corporation serving the City of Chicago with electricity for lighting and power purposes. It was formed by the consolidation of the Common- wealth Electric Company and the Chicago Edison Company as of September 17th, 1907. On Mai;ch 23rd, 1908, the Chicago City Council passed jan ordinance providing that the franchise of the 10 Commonwealth Electric Company be extended to include all sub- sidiary companies and that a compensation of three per cent of the annual gross receipts during the remaining life of the franchise should be paid to the City. It also stipulated the maximum rates for electric light and power to be charged by the Company for the period ending July 31st, 1912. Up to the time of the consolida- tion, the Chicago Edison Company furnished direct current ser- vice in the district bounded by North avenue on the north, Ash- land avenue on the west, 39th street on the south, and Lake Mich- igan on the east, with its principal generating station at Harrison street and the Chicago River. This company, which succeeded to the franchise of the Western Edison Light Company, was organ- ized in 1887 and began operations with a generating station of about 800 horse-power at 120 West Adams street, where a battery sub- station and the main offices of the Commonwealth Edison Company are now located. The franchise was dated April 7th, 1887, cover- ing a period of 25 years, and specified that all wires be under- ground. The Commonwealth Electric Company was formed in 1897 by the consolidation of five companies serving a territory south of 39th street, west to Western avenue, and south to Pullman and South Chicago. Its franchise, which was dated June 28, 1897, and extended for a period of fifty years, provided for a maximum rate of not over one cent per lamp hour for each 16 C. P. incandes- cent lamp, and that three per cent of the gross earnings be paid the City annually, beginning five years from the beginning of operation of the plant. By the acquisition of three competitors serving a territory north and west of the Chicago Edison Company’s territory, the Commonwealth Electric Company at the time of the consolidation with the Chicago Edison Company served practically the entire city with the exception of the Chicago Edison territory, as stated above. The service was practically all alternating current fur- nished from a modern steam turbine generating station at Fisk street and the Chicago River. Both the Chicago Edison and the Commonwealth Electric Com- panies acquired by purchase practically all of the competing com- panies which were started from time to time within their terri- tory. The names of these acquired properties, together with the purchase price and the value of tangible property to the purchaser, as determined by H. M. Byllesby and Company, are shown in the following summary. All of these plants with the exception of three, have been dismantled : 11 SUMMARY OF PROPERTIES PURCHASED BY CHICAGO EDISON COMPANY. Date Pur- chased. Purchase Price. V alue to Company of Phys- ical Property at Time of Purchase. Amount of Pur- chase Price Paid for Good Will and Business. Chicago Arc Light & Power Co — 1892 $2,196,000.00 $1,195,000.00 $1,000,000.00 National Electric Con. Co 1894 96,060.00 10,000.00 86,060.00 Northwestern El. Lt. & Power Co... 1894 75,546.00 13,500.00 62,046.00 Co-Operative El. Lt. & Power Co. 1894 131,081.00 62,915.00 68,166.00 City Illuminating Co 1894 5,590.00 1,500.00 4,090.00 Madison Electric Light Co 1894 2,250.00 350.00 1,900.00 W. J. Pagan Plant 1895 2,000.00 1,250.00 750.00 Dearborn Lighting Co 1896 5,316.00 1,000.00 4,316.00 American Gas Engine Co 1896 1,850.00 1,850.00 Chicago Illuminating Co 1897 95,641.00 44,000.00 51,641.00 Allen Plant 1897 12,000.00 2,000.00 10,000.00 Gregory Central Station Co 1901 16,000.00 8,000.00 8,000.00 Laff & Florsheim Plant 1901 3,000.00 500.00 2,500.00 L. & P. Baer Plant 1901 3,000.00 1,530.00 1,470.00 Merchants Arc Light & Power Co. 1898 25,000.00 5,500.00 19,500.00 Archer Avenue Plant 1898 10,417.00 4,500.00 5,917.00 Bachelle Plant 1898 16,900.00 10,000.00 6,900.00 Offerman Plant 1900 3,100.00 1,000.00 2,100.00 Consumers El. Lt. & Power Co 32,315.00 12,315.00 20,000.00 Murphy Power Co 1899 12,510.00 2,000.00 10,510.00 Chicago Light, Heat & Power Co.. 1900 110,000.00 2,750.00 107,250.00 Zenith Plant 1908 27,000.00 1,500.00 25,500.00 Sparr & Weiss 1904 9,626.00 3,500.00 6,126.00 Buell-McKeever Plant 1906 36,260.00 8,500.00 27,750.00 Miller Plant 1898 29,575.00 11,600.00 17,975.00 Seipp Plant 1903 11,500.00 2,000.00 9,500.00 Hardin Plant 5,000.00 1,000.00 4,000.00 Sectional Underground Company Miscellaneous $2,973,527.00 175,817.00 27,080.00 $1,409,560.00 100,000.00 $1,563,967.00 75.817.00 27.080.00 Total $3,176,424.00 $1,509, 560'. 00 $1,666,864.00 SUMMARY OF ORIGINAL AND PURCHASED COMPANIES OF COMMONWEALTH ELECTRIC COMPANY. Value to Amount of Pur- Date Company of Phys- chase Price Paid Pur- Purchase ical Property at for Good Will chased. Price. Time of Purchase. and Business. Hyde Park Thomson-Houston Co.| Hvde Park Electric Licht Co. j- 1897 $ 278,935.00 Englewood Electric Light Co J Mutual Electric Co 1 1897 627,385.00 Peoples Light & Power Co } Western Light & Power Co $2,126,000.00 $ 906,320.00 $1,218,680.00 1897 250,000.00 193,945.00 56,056.00 West Chicago Light & Power Co... 1897 65,000.00 42,280.00 22,720.00 Edgewater Light Company 1897 15,000.00 9,200.00 5,800.00 Commonwealth Electrio 'Co 1897 $2,455,000.00 170,000.00 $1,151,745.00 $1,303,255.00 170,000.00 $2,625,000.00 $1,151,745.00 $1,473,255.00 While the Commonwealth and the Edison companies were in theory, at least, independent of each other prior to their consoli- dation, they were controlled and operated by the same interests and were not in any sense competitors. GROWTH OF BUSINESS. The growth of the business is illustrated by tables Nos. 2 and 3, showing the annual financial and earning statements of the two 12 companies up to the time of the consolidation, and table No. 4, showing the statements of the combined companies up to 1912. A statistical compilation prepared from combined reports as published by the companies is found in table No. 5, and the information con- tained therein is illustrated in diagrams Nos. 1, 2 and 3. Diagrams Nos. 4, 5 and 6 show the growth in connected load, kilowatt hours produced and sold, and the average daily load curve for the various years. This remarkable growth has no doubt been largely due to progressive management and as a result the Commonwealth Edi- son Company is now the largest electric light and power company in the world. The following table, based on maximum output, shows approx- imately the proportion of all electricity distributed in Chicago in 1911 for public utility purposes and for public consumption as supplied from various sources : Commonwealth Edison Company 73 per cent Surface street railways 7 “ “ Elevated railways 13 “ “ Sanitary District of Chicago 5 “ “ Cosmopolitan Electric and other companies 2 “ “ 100 per cent ' ■ TABLE NO. 2. CHICAGO EDISON COMPANY. 13 G cj « O t-i < SC iiiin cm n tea o • • 8 eg 88 •; : rH x> o CO rH !>■ . . . . 00 co © rH • * • • © ^ CO ^ 00 • • • • 05 sss'as oo 1C H ^ 1 • §w j 3 ^ 00 CO Ttt Oi 00 • • • • 8 388^11 : : : : 1-1 €e* l> • • €e- €fc- 00 ^CM •_•_•• €fc- €#- • • • • ISIS !8® 00 (M ' O <0 88^3 CO Q ^ W l£> cT isss fcSfcJ liiii CM Z& ^ t- Lft CM I— I 2 2 $3! O CM ( ) ^ OO O iSi a 8 „.. s’S o P.+a S3 £ fcn X 0; "S ca owi?5w gq Eh H cc x J S Eh « W . W 4> „ , . - . M'S w-Q w«gi g^S iSo» ^ - a “Og” . flnP<30 M :8S " o 1 1 05 ® §S I CO H g-a 3 o co bo f-< t?j§ ilC B*Sl s 03 'C ■£ a G a g 8 : « © 5 _ £2 s"«fl n w G ►— i R pa o3 h T3 □ ;Sf §s fl Sg£ ^ S. a 8 £ a £ a o SOEftsS'e ® 0 0«C0c»A ffl Total Liabilities $2,469,805. $ 7,197,828. $ 7,769,520. $ 8,054,681. $ 9,171,075. $10,061,152. $10,595,152. $11,555,341. TABLE NO. 2 — Continued. CHICAGO EDISON COMPANY, W H (M (N Oi I - oVlftH 05 CD l> ^ cs! l® OSrH r-T 05 00 i® C® 05 SfcSfcS iassss rH I® .* © •"* O^r-T i— I lOlH I-i Issis? l> i® ift So r® 05 8 © 05 oJl-T r-T II fl II w kH i 85 05 05 88388 gS: Q> O a> < o oi oo <: CO 00 i'- c SB'S! SSffiSB IM 51 D N H ^"fiVoj hhon - CO CO & ISS 5 ! lA '44 Cft l> ssW i® ID ip 111 ! iii¥ 8 £§!§ f= sags W W QJ £ o'g •^(§3 a <» <3 - 2 * o g I l®* P«2 O _ II a, ® a 5 oa ill IIS aa* iSWl* s§§ s "ii 8 " illlissiii' I o ^ ^ ^ 1 s 88 SS 88 S fi *5 © 05 © ~ © 05 lO lO o ’ CO H CO ^ ' ^ H lO b i gggg; 00 ^ 55 K 3 88 5 co S 8888S (MHrtH d eg OO O ^ IM WHOM 88 as 32 eg o' i> 2£ ow W tuoW • 2 "O- 5 to © 88 8 53 to CO '»f © © • S : © © © © ^ to • • • • © S 3 co l rH 88 co c3 || « jj-r‘ i iO © © » O ^ LO • • • • © © © ^ * lO Oi .... €©■ < 1 1 «£- See- . G£ • • Q; • • ee- &r < »-p d) 3 ts M >>4-> cs a S« S- o ogO ^3 w „ ., o-c a Oh I><300 M ^03 a ”* SI 1-H 4H> t® -H _P ®$E 5IISJSSS8 Total Liabiliities $ 7,595,196. $ 7,788,536. $ 8, ‘508, 032. $ 9,303,965. $10,753,968. $13,449,958. $14,505,275. $17,088,149. $20,970,057. 16 - A TABLE NO. 5. — COMPARATIVE DATA BASED ON COMPANIES’ PUBLISHED STATEMENTS. TABLE NO. 4 . COMMONWEALTH EDISON COMPANY. 16 ’O £ 88SJ wTt-Tod'' 1 05 f «5 ©) ao -*> eo S2 1 S119S1BSS 8 g a 58 g 858 1© HMMOW© i iisgg§igi i ‘ ” t£ lO Ovj CO OQ »0 (M f- Lft 3 CO 1- Oi 1^- 0^ 00 2>S I88S18 §8 iiiiiiiii 1 ©®H(M(X) QO 1'sWSS oO SlWSSlil s CO 00 •«* l-T (N £ " I gs ~ i I Ssl£§l 1 ii.p.iips i iW g ‘i £ il*£'£8SSS3l £ i - ~ ^ Q e entitled to earn a fair return. But in this case, the new pavement under discussion does not represent any investment or expenditure by the company. The relaying of the original paving does ahd it has been included in ‘net cost,’ as above set forth. “If one were to estimate the cost to reproduce as new the prop- erty that exists today, the present paving would have to be replaced when the streets were opened for the laying of mains and services. Apparently this is the only basis upon which the company’s contention is founded. The cost-of-reproduction method may be the only method which can be used in some instances, but to follow it to the last ex- tremity in all cases, ignoring all other considerations, not only leads to absurd conclusions, but runs counter to judicial decisions. “There are two other arguments that have not been submitted in this case, but to which reference should be made in this discus- sion. One is that if a competing company were to build a gas system, it would be obliged to pay for the existing pavement over its mains and services, as it would have to replace it during construction. True! But does it follow that gas rates would in practice be based 34 upon the cost of the most expensive service? Even the maximum to be fixed by law would not of necessity be based upon the cost of the most expensive service. However, this argument is irrelevant be- cause it is the policy of this State that public regulations of rates should take the place of competition and that unnecessary duplication of plant shall be avoided. The State is to protect the consumer against unreasonable rates. But if the State must fix rates upon the basis of competitive supply, it is evident that the consumer has lost the ad- vantage of competition and not gained those of monopoly. ‘‘It is also argued that if land should be taken at its present value, mains and services should likewise be appraised at the cost to reproduce; that the increase in the value of the land is a social in- crement; that improvement in paving is also a social increment; and that if one is to be recognized as belonging to the company, the other should be. Doubtless there is some similarity, and so far as there is, there is equal injustice in allowing the company to make a profit upon that increase. Indeed, it is not yet clearly settled by the courts that in all cases land shall be taken at appreciated value and the company allowed to increase its rates because of such growth. But pavement that is not owned nor laid nor paid for by the company is very un- like land. ‘Tn the first place, land is owned or leased by the company; the pavement in question is neither owned nor leased. The company may sell the land it has and buy other land; the company has no such right over pavement, and if it removes its pipes, the pavement remains. “Secondly, the company pays for land; it does not for new pave- ment. Land is a necessary factor in gas production and distribution; pavement is not. It matters not whether the streets are paved with the most expensive material or allowed to remain in their natural state. Repairs may cost more in the former case, but such expenses are paid for out of income and not from capital. “Thirdly, the precise land used is selected by the company; the nature of the pavement is fixed by the public authorities. If the com- pany finds its land not well adapted to its needs or too valuable for gas purposes, it may sell and purchase locations elsewhere. Thus, a company may secure the increase in value for itself. But there is no known way whereby a company may sell the pavement over its mains and substitute another kind. Pavement is wholly beyond the control of the company.” PAVING STATISTICS. The records of the Commonwealth Edison Company’s conduit construction are not complete in detail prior to January 1st, 1897. Between that date and the date of the appraisal, June 1st, 1908, the conduit records on all new construction were checked with street paving records of the Board of Local Improvements to as- certain what proportion of pavement was actually relaid at the expense of the company. Information was obtained from which the following percentages were calculated : 35 PERCENTAGE O F ALL CONDUIT AND TUBE PER CENT OF APPRAISED VALUE OF (TRENCH PAVING OVER UNDERGROUND SYS- FEET) I N- TEM WHICH COST THE COMPANY STALLED BE- NOTHING. TWEEN JANU- ARY 1 , 1897 . AND JULY 1, 1908 . Conduit and Edison tube laid in advance of pav- ing Changes in paving be- tween date of installa- tion and date of ap- praisal which in- creased appraised value of paving Company’s Estimate Actual. January 1st, 1887 to June 1st, 1807, to June 1st, 1908. (All Conduit 1908. (During This and Tube Was In- Period 56.9% — on stalled During This Trench Foot Basis- Period.) of All Conduit and Tube was Installed.) Total 14.6 26.5 41 . 1 % 45.8 18.1 63 . 9 % 30.8 13.5 44 . 3 % In the case of the conduit and Edison tube installed prior to January 1st, 1897, the paving charges were much higher than in- dicated by the above figures, as a large proportion was laid in dis- tricts where streets were paved and the Company’s requirements in underground construction were not anticipated to any extent when streets were repaved, as has been the case in later years. Assuming that in conduit construction prior to 1897 the paving expense to the company per trench foot of all conduit installed was not less than double the amount from that date to June 1st, 1908, the estimate appraised value of paving not paid for by the company would amount to 48 per cent of the total. The company’ s estimate of 41.1 per cent is accordingly deemed reasonable and that per cent of the total appraised cost, or $633,468.00, is deducted from the ap- praised value of conduit. When correction is made for the differ- ence in overhead charges as estimated by Byllesby and as allowed in this report, this amount is reduced to $601,662.00. Since 1908 the company has not included in its conduit con- struction costs any paving charges not actually expended. ACCRUED DEPRECIATION. Depreciation can be defined as a decrease in value occasioned by wear or age; change of conditions rendering the structure in- adequate for its particular functions or changes in the art which render it obsolete as compared with more recent structures. De- preciation due to wear can largely be offset by maintenance, but that due to inadequacy and obsolescence cannot. For rate mak- ing purposes, depreciation must be considered under two headings ; first, accrued depreciation used in determining the present value of the property; and, second, an annual allowance from earnings to offset future depreciation. While depreciation is sometimes not handled under these two separate headings, it is advisable that it be so treated, because these two classes of depreciation should be estimated on a different basis, as explained later. In nearly all leading rate cases cost new, less depreciation, has been taken as the plant value, and in some states where com- missions are established and rate regulation is enforced, the laws specifically provide that present value must be the basis for rate making. Depreciation for determining the present value should prop- erly take into account only such wear, inadequacy and obsolescence as have accrued up to the present time, and should not regard what may be estimated as the future depreciation due to these causes. Past experience in the electric light and power industry has proven that up to the present time inadequacy and obsoles- cence are the greatest factors in depreciation. The present case is no exception. With regard to accrued depreciation for rate making pur- poses, Whitten, in his “Valuation of Public Service Corporations,” says : “There is another consideration that leads also to the conclusion that existing depreciation should be deducted in a valuation for rate purposes. A public utility service is assumed to be continuous. The service can only be rendered by constructing plants, the parts of which will inevitably deteriorate with age and use and have to be re- constructed from time to time. There must always be a start with a new plant and there will always exist a certain percentage of deterior- ation in the old plant. As the process is continuous the investment cost must be assumed to be continuous. At first thought it might seem that a uniform investment cost could only be secured by assuming a uni- form capital value. This would indeed secure a uniform charge for in- terest and profits, but not a uniform total investment cost. The invest- ment cost is not simply interest and profits on the actual investment in physical property, but it includes all cost for repairs, renewals and replacements necessary to keep such property in good working order. Average annual expenditures for repairs, renewals and re- placements are greater in an old street railway system than in a new system. In order to equalize this increase in the investment cost there must be a corresponding decrease in the annual charge for in- terest and profits. In other words,, the investment must be reduced. This is done with equity to the investor by using the savings of the earlier years due to smaller expenditures for repairs, renewals and replacements to amortize the investment, i. e., to return to the in- vestors a portion of their original investment. “The fact that rates of charge are based on a fair return on the depreciated value of the old plant does not mean that rates will or can be reduced on account of this depreciation in value. It does not mean that the rates established as reasonable for a new plant may be reduced as soon as the plant becomes worn. But the depreciated value is taken because with the increased expenditures for repairs, renewals and replacements, rates of charge would otherwise have to be increased. The only way that this is avoided is by a reduction in the capital value and consequently in the charge for interest and profits, sufficient to offset these increased expenditures. In this way the investment cost is made uniform and likewise the reasonable rate of charge.” 37 The manner in which accrued depreciation was treated in the Company appraisal is shown on page 28. For the purposes of this report the factors entering into the computation of the accrued depreciation were obtained from such records as were available and from such personal inspection as was possible. In estimating depreciation Byllesby did not depreciate the overhead costs except engineering and insurance charges. As in practically every case when portions of the plant have depreciated to a point where they should be renewed, they have become inade- quate or obsolete and are not reconstructed along the old lines, and overhead charges for engineering, insurance, taxes and interest during construction and contingencies must be added to the cost of new construction. This being the case, when the property as appraised is superseded, the greater part of the overhead cost would remain on the books, resulting in the addition of fictitious capital values if this method is employed. Therefore, in this report all overhead charges have been de- preciated in the same ratio as the physical property. This is also the practice of the Commonwealth Edison Company in “writing off” superseded property. INVESTMENT IN SUNDRY PROPERTIES. The largest item under the above heading which the Company presents as part of the investment, to be included in the determina- tion of rates, is investment in coal properties, amounting to $395,- 172. Since these properties are not being operated, it does not seem proper to include them in this valuation. The discussion of a similar problem contained in the opinion of Commissioner Maltbie in Mayhew vs. Kings County Lighting Company, 2 P. S. C. 1st D. (N. Y.), decided October 20th, 1911, seems applicable here. He says: “Prudent management may require that land shall be purchased in advance of actual needs, for it may be clearly impossible to secure adjacent property just as it is needed at reasonable terms. Upon the other hand, it would be unwise for the Commission to adopt a policy that would encourage a company to speculate in land ad infinitum and to call upon the gas consumers to pay its losses. Even if they were to share in the profits, it would be unwise, for the pur- pose of a gas corporation is not speculation in land, but to supply gas to consumers. The distribution of gas is a quasi-public function, and for this reason gas corporations have been given unusual powers. Speculation in land is not such a function. But if a company does acquire more than is immediately necessary, and if such acquisition is reasonable and wise, the consumers, who, under the circumstances, must carry the burden, should also share whatever gains may accrue from such ownership. It is the opinion of the Commission that a company should be allowed reasonable latitude, that it should not be penalized for purchasing land somewhat in advance of its needs and that the resulting revenue or profit, being a necessary adjunct of the distribution of gas to the extent that the property itself is a part of the gas property, shall be considered part of the income of the com- pany. “Applying these principles to the iacts in this case, it is clear that the land which is not used even in part for gas purposes should be excluded from consideration; it should not be included among the property upon which a fair return is to be earned, and the income therefrom should not be treated as part of the income of the com- pany for the purposes of this case.” Other items of investment under this heading include sundry securities, cash advances and miscellaneous properties. With the exception of merchandising and advertising investment (which have been included in Unclassified District Installation) considera- tion of these advances and properties is not essential to the question of rates. INTANGIBLE VALUES. The above caption in this discussion is used to designate all those values, real or doubtful, in addition to physical plant value which are claimed and disputed in most cases of rate revision. Such items as contractor’s profits, engineering and supervision, legal and organization and similar expenditures are considered a part of physical value and are treated of elsewhere in this report. In the history of rate revision capital allowances have been claimed on various hypotheses, among the apparently most reason- able being: that a value for franchise be included because of its worth to the owner; that going value arising from earning ca- pacity be given weight; that cost of development is experienced by all utilities and consequently must be considered. The consideration of franchise value in rate cases resolves itself into a question of grantor versus grantee. The munici- pality as grantor confers upon the corporation the rights and privi- leges of operating and maintaining plants and in connection there- with use of streets and public ways as necessary in furnishing service to the public. The grantee agrees to conform to the pre- scribed municipal rules and regulations and under the rights re- served by the state, and in some cases by contract with the munici- pality, subjects itself to regulation of service and rates. In a franchise so granted, where the public confers the right to operate and receives in return only proper service at reasonable rates, the placing of a value upon such operating rights is in effect penalizing the consumers for the privileges conferred. The allowance of a reasonable return upon the capital value, as determined by appraisal of the property resulting from proper expenditure of capital funds, cannot therefore be based even in part upon a value which cost nothing but obeyance of law and re- spect of rights, and which value arises solely from the opportunity of serving the community. In the case of the Commonwealth Ed- ison Company there is no evidence in the Company’s or City’s rec- ords that a payment was made for franchise privileges ; accordingly no allowance for franchise value is made in this report. The question as to whether a public utility, when considered from the rate making standpoint, may have any value over and above the worth of its physical property is dependent upon the conditions under which that utility developed. Such conditions may have been beyond the control of either 39 the people or the utility or may have resulted from policies later abandoned, or through the development of the utility and community been outgrown. From the general view point, if a utility is a neces- sity to a community, it must receive sufficient revenue to pay op- erating expenses and depreciation charges at least. In supplying electricity, under normal conditions, the unit costs are not in direct proportion to the volume, but decrease with increased business. Consequently, and this with equity to the investor in public ser- vice corporations, rates can be lower in the case of a utility with a large business than in the case of the same utility with few cus- tomers and little business. The business of any utility in a growing community will or- dinarily increase in some normal ratio to the increase in popula- tion. To develop the business at more than this normal rate of increase, advertising must be resorted to and concessions granted to acquaint the prospective customer with the desirable features of the service or make his original investment of small consequence. Income may also be increased by the purchase of plants and busi- ness of competitors. This policy of development requires the expenditure of sums of money and the conditions under which such money was ex- pended must be the determining factor in any allowance for in- tangible values. The rule as established by legal precedent seems to be that when' earnings or profits have been returned to the business by investment in plant such expenditures are proper items for cap- italization, the theory being that the surplus might have been used to pay dividends, and additional securities sold to provide for the new construction. See Brymer v. Butler Water Co., 179 Pa. 2B1, 36 Atl. 219, 251; Kennebec Water Dist v. City of Waterville, 97 Me. 185, 54 Atl. 6, 17. If, however, capital funds, income from operation, or net earn- ings have been expended for development, through methods which produce no tangible values, treatment is not necessarily similar. This has been proven, in divers cases, by the different methods of determination advanced and the varied final results. In arriving at these results consideration must be given to circumstances at- tending the contribution of funds : Whether stockholders contribut- ed additional capital or suffered inadequate returns for the time being, with or without subsequent restitution, or whether the amounts were contributed by consumers in the form of excessive rates. Among theories advanced as to procedure in calculating in- tangible value, is one which assumes a hypothetical plant built on the date of the valuation which is to acquire the business of the ex- isting plant in the territory served by it as rapidly as possible under non-competitive conditions. The present worth, or what an in- vestor could afford to pay for the future annual excess in net earn- ings of the existing plant until they had been reached by those of the 40 comparative plant is taken as the going value. In other words, it rep- resents the value of the plant and business in excess of the value of the physical plant alone. The number of assumptions necessary to compute going value on this basis renders it unreliable and or- dinarily precludes its use except for comparative purposes. Another method of computing going value assumes that the plant is entitled to earn a fair return on the investment from the beginning of operation, and that any deficiency in net earnings should be capitalized for the following period and until the plant is earning a fair value on its total investment and the excess earn- ings have offset the deficiencies of former years. In other words, it might be said that this method capitalizes the losses of operation and amortizes the losses when the earnings are sufficient. The objection to this is that a plant with little or no business may have a large going value, and also that the interest on losses is com- pounded annually. Before this method can be applied with any degree of fairness, it should be evident that the records have been carefully kept and can be substantiated, that the plant has been carefully managed and that the original investment was wisely made so that a premium is not placed on bad judgment or mis- management. It should also be understood that the period over which this method of computing going value is calculated should be limited to what might be called the original development of the utility. In the Company appraisal, Byllesby has treated intangible value under two heads, namely, good will of acquired properties and the cost of getting business. Good Will of Acquired Properties : The term “Good Will” ordinarily means those characteristics of a concern by which it enjoys business and patronage which might otherwise go to its competitors. On this basis, then, a monopoly can have no good will, but its expenditures for the acquisition of the plant and business of its competitors may be legitimate cap- ital charges if made in good faith and if the public is ultimately benefited thereby. This raises the question of competition vs. monopoly in the electric lighting field. In the earlier history of public utilities, competition was the principal means employed to insure the public against exhorbitant rates. Rates were established which allowed a fair return to the investor for the time being, but did not permit of sufficient re- serve for depreciation and increased maintenance charges as the plants approached the end of their useful life. Depreciation was not in general understood by public utility operators, while it was a very important item in the case of electric lighting plants on account of the extremely rapid progress in the art. As a result the small competing plants, in many cases, could not exist and give satisfactory service for any considerable period without in- creasing their rates, and therefore, they were either forced to consolidate with larger and more recent companies or to make an 41 agreement between them to increase the rates. Thus it often hap- pened that the method employed to prevent unreasonable cost of ser- vice became a means by which such conditions were brought about. After consolidations took place, in many cases the rates were raised and maintained until competition again became a factor. It therefore became recognized among students of the problem that competition did not necessarily mean in the long run the lowest rates to the consumers. The advocacy of competition ignores the fact that public utilities are natural monopolies, which under proper regulation are capable of rendering superior service and ultimately are able to exist under a lower schedule of rates than is possible under competition. With further regard to this phase of the question bearing on the Commonwealth Edison Company’s property, the following is quoted from the Company appraisal : “All electric lighting companies, particularly in the past, have suffered from competition of generally ill-considered and recklessly managed plants which have invaded their territory. Such competi- tion has uniformly resulted in a greater or less demoralization of rates. This has been particularly the case where one company has been much larger than its competitor or competitors and where the larger company has fulfilled its natural function of supplying elec- tricity at substantially uniform rates to all consumers which its lines reached regardless of their location. “A large company of this description serving generally the whole territory which it occupied, as has been the case with the Commonwealth Edison Company and its predecessor organizations, frequently suffered from the location under special franchise pro- visions of plants in the center of some part of its best paying ter- ritory. The small plants from the nature of the rights under which they operated were frequently not compelled to go outside of the very remunerative territory which they occupied, and also had no obligations resting upon them for the increasing of their plants. Con- sequently, in order to obtain the business from the larger companies, rates were made which were believed to be remunerative to the smaller companies occupying a limited field, but which if forced upon the larger company would prove most burdensome, if not ruinous. "Inferiority of service is bound to be the outcome of such com- petition, and it is today generally conceded that a public electric light- ing company must have a monopoly of the field. “Furthermore, competing franchises have been given by munici- palities to many different people and companies in the past for sup- plying the same area, so that the burden that many large companies have suffered can be directly ascribed to the municipalities them- serves. “The natural tendency of any competition is to spread with the attendant lowering of rates, because one customer feels, and naturally, that he should receive as good a rate as his neighbor for the same character of service. The only course for the company covering the whole field is to purchase and this at figures usually be- yond the physical value of the properties so acquired. The plants purchased have usually had to be scrapped or sold on the second-hand market. The systems of distribution are usually unadapted to the systems of the purchaser and they, too, have to be disposed of in the same manner, so that the price paid, as a rule, for competing com- panies is largely for ‘good will and the business’.” The purchase price of the various competing companies ac- quired at different times by the Chicago Edison Company and the Commonwealth Electric Company, as shown by the appraisal, which was the only source of information, was $5,801,424, to which 10 per cent was added for incidental expenses, making a total of $6,381,566. The appraised value of the physical property useful to the purchasers was only $2,660,305; the balance, or $3,721,261, therefore, being excess, representing cost of the acquired business to the purchaser. While the amount of $3,721,261 represented excess cost to the Commonwealth Edison and its predecessor companies, it undoubt- edly represented to the small vendor companies some tangible prop- erty which had been necessary and useful in supplying service. The different types of investment and the different methods of distribu- tion used by the purchaser rendered such property unnecessary and valuless for operating purposes. The methods used by the appraiser in determining the value of purchased properties follow : “The Commonwealth Edison Company has kept a careful record of the property, business and other circumstances of the companies it has acquired. “We have familiarized ourselves with the history of such com- petition, and have examined maps and records and inventories and original papers of negotiations upon them; we have informed our- selves upon the condition and disposal of the physical property of such companies, and how the systems were merged after the pur- chase. In this way we have formed a basis for valuation of the worth of the physical property. The difference between this figure and the price paid represents the good will and the business. In treating the useful physical property of such companies, we have been as liberal as possible in considering what its cost value was. We have not only added an adequate contingency and engineering per- centage, but have added a percentage for piece-meal construction, which is very large (in percentage figures) in small companies, and have added a percentage for the organization, legal expenses and brokerage incident to making such properties productive. From the physical value, plus engineering, contingency and piece-meal con- struction percentages, we have deducted an amount for depreciation, arrived at from a study of the history of the situation and other in- formation afforded. The depreciation amount has purposely been kept low so as to be conservative. “To the total purchase price paid in cash, or its cash equivalent, has been added a brokerage figure of 5% to cover the cost of obtain- ing money.” SUMMARY OF PROPERTIES PURCHASED Purchased by. Purchase Price. Chicago Edison Company $3,176,424.00 Commonwealth Electric Co.... 2,625,000.00 Value to Company of Physical Property. $1,509,560.00 1,150,745.00 Good Will and Business. $1,666,864.00 1,474,255.00 $5,801,424.00 $2,660,305.00 Add for brokerage and legal, auditing, organization, in- cidental and engineering investigations, 10% 580,142.00 $3,141,119.00 580,142.00 $6,381,566.00 $2,660,305.00 $3,721,261.00 43 In the detailed statement of price paid for acquired properties are items amounting to $197,080.00, for which the purchaser re- ceived no tangible property whatever, or, in other words, the price paid was for franchise only. In all other cases, while the price paid was in excess of the value of the physical property to the buyer, the purchase brought with it some connected load and es- tablished income. Evidently, the public should not be forced to pay in electric rates a return on capitalized franchise value, which, as previously stated, it granted without cost to the grantee. This amount of $197,080.00, accordingly is deducted from the total price paid for acquired properties. To the price paid for the acquisition of these competing prop- erties, 5 per cent was added for the estimated expenditure for legal, investigation and incidental expenses, and 5 per cent for the cost of obtaining the money or brokerage. While those estimates ap- pear reasonable in amount, the item for brokerage should not prop- erly appear in capital, as has been explained previously, and there- fore has been eliminated here. Deducting this item amounting to $280,217 and the $197,080 above mentioned, the net figure for the cost of acquired properties as of June 1st, 1908, is $3,224,256. This amount has been included in capital value because it represents, so far as can be ascertained, capital spent in good faith for property and business, the acquirement of which has been of undoubted benefit to the present day user of electricity. Cost of Getting Business : The following is taken from the company appraisal under the above headings: COST OF OBTAINING NEW BUSINESS UPON THE SYSTEM OF THE COMPANY. “In maintaining an undisputed field, which is a recognized es- sential in public electric lighting enterprises, extensions have to be made into territory that is oftentimes sparsely settled and to con- tinue in territory where competition has sprung up, and efforts must be put forth to create business upon such lines as an offset to interest obligations, maintenance and operating expenses, and even deprecia- tion, which otherwise would accumulate before the lines become fully productive. Furthermore, a company following good engineering practice must attempt to construct for the future, even in good ter- ritory and efforts must be made to produce business upon such lines to make the outlay remunerative, in other words, the cost of pro- ducing business is to an extent an offset to interest burdens and even depreciation. It is essentially so in communities in which com- panies are not protected in their franchises and where many other well known influences force the company to cover all the territory. “Large outlays are accordingly made and must be made in ad- vertising, soliciting and in free wiring concessions, and often times in other special concessions. This expense is only a contributing in- fluence with efficiency of service and reasonable rates in producing volume of business, which ultimately reflects in permanently lower rates to the public, which can only come with volume of business and a free field, and this outlay is apart and independent of the in- fluences of rates and general efficiency and reliability of service. The outlays in territory where competition is sharp are always large. “In addition to the foregoing statements, the money spent for ‘New Business Account’, and which covers only the outlays in ad- 44 vertising, canvassing, demonstrations and free wiring for the ob- taining of new business, comprises an expenditure which produces for the company a permanent source of income and must not be likened to the Celling expense of a trading concern where there is a selling expense for each transaction. “When commissions or municipalities protect companies these outlays will not be as large as in the past, but even then they must to som<* extent be necessary as an offset to interest and depreciation charges, arising out of construction for the future, and if commis- sions rule that such outlays must be charged to operating account, they must sanction rates which will cover such expenses, otherwise companies must sink to the level of the municipality operated un- dertakings, of which we have knowledge. “In the foregoing view of the case we believe this to be a legiti- mate item in the valuation of this company, forming a portion only of the intangible valuation of the general public good will. “You have given us the outlays which your company has made in the past in producing your connected load, and in comparisor, with outlays of a similar nature in other large companies we find them to be reasonable. “Your statistical department has given us the following data foi your connected load (exclusive of railway load), as of June 1st, 1901s; Number of customers 72,096 Incandescent 16 C. P. equivalents 2,107,813 Arcs, 1,200 C. P 3,283 Arcs, 2,000 G. P 14,093 H. P. of general motors 72,980 H. P. of elevator motors 32,533 Battery charging o'f private consumers (kilo- watts) 5,545 Total 16 G. P. equivalent 3,965,174 The outlay in producing this business as reported by your com- pany has been as follows : Advertising $ 649,900.00 § Soliciting 944,500.00 § (*)Free wiring 575,700.00 § Total cost $2,169,700.00 § (*) Wiring of signs is included in the valuation of signs under “Physical Valuation.” §* Figures are taken from Vol. 1 of Byllesby Appraisal.” As far as can be ascertained, all expenditures in connection with the cost of getting business have in the past been defrayed from revenue and charged to operating expenses in the cases of the Commonwealth Electric and Chicago Edison Companies, as well as in the case of their successor, the Commonwealth Edison Company, and were not capitalized until the appraisal was adopted as a basis for capitalization of the consolidated Company. In other words, these amounts spent for developing the busi- ness in the form of advertising and soliciting were charged to operating expenses and were consequently borne by the consumers during those years unless deficits resulted which placed the burden on the stockholders by impairing their return on investment. Inasmuch as substantiated records of the company prior to 1908 are not available, reliable computations cannot be made under any of the methods where capitalization of deficits until amortized 45 by profits, is the basis, but the records of the company today in- dicate that if such losses were suffered they have been requited. It is reasoned that inasmuch as the Chicago Edison Company has paid dividends since 1889 to the date of consolidation at the rate of 8 per cent per annum, that the Commonwealth Electric Company was operated in the interests of the Chicago Edison stockholders who have since received stock value for that interest; that since the date of consolidation dividends have been paid at rates increasing from 5 per cent to 7 per cent annually, and that in addition to these returns the Company during recent years has written down plant value directly from earnings and has further accumulated a com- bined surplus and depreciation reserve amounting December 31, 1911, to $7,764,540.00, which is in excess of our estimated accrued depreciation, therefore a claim for going value on the basis of accumulated deficits would be unwarranted. No allowance has ac- cordingly been included in capital value for advertising and solicit- ing, because, in brief, this expense has been borne by consumers, with no loss to the Company, and it would be grossly unfair to now capitalize such contributions from which the Company, as well as its patrons benefited, and thereby penalize consumers a second time, as would in effect be done if they were required to pay an interest return on such a capital allowance. Included in the cost of getting business is an item repre- senting free wiring amounting to $575,700.00. Free wiring prior to the company appraisal consisted mostly of price concessions on wiring of premises for prospective customers. In character of expenditure these concessions are similar to expenses incurred in cutting through paving which create no property value for the Company but are necessary in order to supply service. Because of the tangible character of the investment and in accordance with the principles previously discussed and cases cited, the item of $575,700.00 for free wiring is included in capital. The so-called free wiring done at present represents cost of wiring signs, Tung- sten fixtures, posts, etc., and the value thereof is returned in the service charge. Below is a summary of the excess cost of acquired properties and allowance for free wiring included in this report for valuation purposes. A deduction made by the Company in its annual writing off is included therein, for the reason that the Company has cap- italized the previously discussed expenditures met out of past earnings, and the cost of eliminating competition, and has received a return thereon, in addition to which it was able to accumulate this credit of $552,277.00. It is believed equitable that the con- sumer should receive the benefits of such excess. The amount $3,274,679.00 composes the total tangible value as of June 30, 1911. 46 SUMMARY OF EXCESS COST OF ACQUIRED PROPERTIES AND FREE WIRING INCLUDED IN VALUATION. Excess cost as shown on page 42. . . $3,721,261 Less price paid for franchise only, plus 10% $216,788 Less brokerage 280,217 Total exclusions $497,005 497,005 $3,224,256 575,700 Total as of Sept. 17th, 1907 $3,799,956 Written off by company 552,277 Balance as of June 30, 1911 $3,247,679. WORKING CAPITAL. In determining the amount to be added to investment to repre- sent working capital, the proper unit has been considered the amount of money necessary to run the Company until such time as the re- turn from sales of current and merchandise will defray the ex- pense plus the profit from operation. This figure has been added to the amount held in stores and coal reserve, and together with a minimum cash balance makes the total allowance for working cap- ital. The factors entering into the computation of time are length of reading period, time necessary for billing and time allowed for payment. If it takes the full time of each of these factors, the meas- ure of total expense is the ratio that the total of days in all fac- tors bears to the full year. If meter reading, billing periods and pay periods for a class of service are made from day to day, i. e., distrib- uted throughout the month, the expense necessary to furnish that class of service is not accumulated from the day of commencing ser- vice to time of payment, but is continuously returned, so that ap- proximately only one-half of the total expenditure is involved at any time. Because of the fact that all bills are not of the same amount, but will vary from month to month, a factor of 60 per cent of the total time has been used for those classes of service in which readings are distributed. The various periods for each class of service have been fur- nished by the Company, the ratio of that period to the year deter- mined, and the percentage applied to the year’s revenue of that class of service. The ratio of operating expense to income from operation has then been applied to give the amount of expense in- curred in producing the recorded amount of revenue. The Company’s coal supply would vary from year to year, de- pending on local conditions, such as strikes and famines, but it was considered that a supply sufficient to operate the Company for an average three months’ period would be an ample allowance. The remaining items in the accompanying schedule are self- explanatory, the sum total of $2,535,690, which amounts to 16.39 Balance . . . Free wiring 47 per cent of the gross revenue (including merchandise sales) , pro- viding a total allowance deemed fair for average conditions. While it may be maintained that a minimum cash balance of $500,000 is not sufficient protection to the operators of a Company of this size, it is well to remember in comparing this item with published balance sheets that the amount of cash is being contin- uously augmented by profits from operation which are only period- ically disbursed in dividends and interest, and then only in part. The above method of computing working capital is believed to be fairly indicative of the necessary amount to operate this Com- pany. The ordinary method of considering excess of current as- sets over current liabilities may include periodic increases in cash as dividend and interest payment dates approach, or cash awaiting investment in plant extensions or bills or accounts receivable aris- ing from business affiliations foreign to the business under regula- tion, any one of which would destroy the value of such a computa- tion as an index. It is not considered necessary to allow an amount for defray- ing the expense of plant extensions because in the physical valua- tion, interest carrying charges have been allowed both on the orig- inal plant and additions since. Materials for repairs are carried in stores. WORKING CAPITAL. 48 Oorres ponding Amount of To- tal Revenue Percentage Aver- age Period is of 365 Days 60% of (Dist.) To- tal Days, 100% of (Co-in.) To- tal Days Readings Co-inci- dent or Distrib- uted Through the Month Readings fPay Period... Billing Period Reading Pe>- riod ji Percentage i Gross . . of 1911 Revenue s iisisiig i siggi i °0 COt-COiniCrHtl© MO 1-1 ^ ^ 1-1 1-1 ^ 1 <£> CO <£} C$ g i & ^ . .^s . . • . tH . * . 4 i asssssss oo coimcooo^o^coco ! §> in iflo’Eapoa 3 2 ^ 3 'p [a ys xi 3 3 -Q '3 '3 'S '3 £ .a a 'C a a s a Qooflgooo ^04-00000 OOMOoOioio h h h im im h h COcoM©©©'**'# i§ 8S8SaS8gg 58 ^ ’8 ' ' *S 8 in in co © t< iq T © © cn eo © co 6a o c) i, cc _ 3 a " tm.5y a: • tuo • m .2 6a co S -9 QJ 03 ’3p? O c3 o > S c I— i ~ 09 60 r-> 6aS4 » ^ js « .g w ' o « a > a .sp g pl, s fj 53 & <§•2^* *-5 occ OfllcS^Ofl w Si .hs* o .2 S 6C* w.ifi « •a-g-gs *h r') m 03 03 s° aw °« .9 n-i __ O 02 $ 'd 2 _cs .2 ^53 ^ Q >,q g s 4^+s « a a p 2 >>3 3-w 0 agg o-| Q, 5 s .y WORKING CAPITAL SUMMARY OF INVESTMENT. 49 II | Final Value, Cost | Less Depreciation I as of 6-30-11 on || Revised Basis i m isss si Him § mi B3 i® OS 'dT • 10 ©q CO co j Accrued Deprecia- j tion to 6-30-1911. SSB :8SS II Sllli gSS ;ss| »g !3S«s Original Cost as of 6-30-1911 on Revised Basis i‘ If Additional Deduc- II tions on Account 1 1 of Unused Prop- | exty and Equip- ment i iii ills §8 iii'is s mi m i| iiiis Removals on Ba- sis of Revised Original Cost... 3 IlllSiS II ISliS SgSSggg sss §j§ 83 S§ Additions from 9- 7-07 to 6-30-11 with 3% Added for 'Carrying Charges on Real Estate and Con- struction I SSI -‘a'i li Sills II |il/” r-T rH ! Revised Original Cost as of Sept. 17, 1907 Byllesby Original |l Cost 2 11 III! Sslii g 11 oT CO 00 nm si 8 s§§§ oT oq 01 oi 1 i| §1 11888 1 is ®i§§ gs iiiii I! Jj Byhesby Accrued Depreciation : S : iliii : : iligi § i 1 i : 03 r—t 03 ; ISS« CO g : r_l a Byllesby Figure* Adjusted to 9-17- 07 as on Books of Company ^ 53 -aS^3®-g-S; sSSlSeSS kO 50 The final valuation new and the present value of the used and useful property of the company as obtained by modification of the appraisal together with the net additions and adjustments as ex- plained in the foregoing pages and shown in table 7, is summarized as follows : Physical valuation, new $57,680,056 Less accrued depreciation 5,479,867=9.50% Present value of physical property $52,200,189 Excess cost of acquired properties and free wiring 3,247,679 Working capital 2,535,690 Total valuation as of June 30, 1911 $57,983,558 REVENUE. Adjustments were made in arriving at the total 1911 revenue for contracts at present active or pending with street railways and bulk supply customers, the effect of which is retroactive; for con- tracts with charitable institutions allowing rebates deducted from Income Account which are not allowed to other consumers of the same power or lighting classes ; and for minor bookkeeping charges. The entire adjustment increased the total revenue from opera- tion for the year 1911 from $13,902,266 to $14,038,115. The reve- nue is classified and analyzed in the following summaries for 1911 and 1912. See tables 8 and 9. The 1912 figures were adjusted on account of retroactive rail- way contracts. Diagrams Nos. 7, 8 and 9 show operating income and revenue per k. h. w. and per 16 c. p. equivalent of connected load for light- ing, power, railway and total business for a period of fifteen years. 51 05 •rH < m w « H 05 o fe co 05 5=> O W W oo £ CO w CO Q £ CO « wJ o Q W £ o o g fc o £ o CO 05 < Dh S O 8m o 3 4 _> O' g& o« t-, w Q) CW Oh 2 W O) 3 3 r? c 35 co «o oo •»* oo oo . M fe r-l OM 00 Oi lO CO CO rH t- HO'cH ' ® OH 00 CO rH ’ 50 03 ^ ofi t-«2 go W OtI, CJ I -gEnglQ” Ssgffl Iz 2 q .2 m O "2 H •“ < 23 “ = § 0 ^ 8 ^ 0~ ffl? _ p o£Sss PhPhOOG 0202 '* H P H 05 O P C/2 05 P O K . ^ TJ o* o 3*5 o> . gw 02 • «5- go®; «* 6-2 02 P P < m Q £ in 05 o II ft 2 0 o> < > 2s * * **$s i£> t— uo !Sf2^ :ggg 8 "1 $$£83858 S 3 8 i» >> o> o „ o .-s a « w pH O O O CZi QQ CS ^ as "o 32 Ofl -i > o^O^ 1 «OK| 2 £h o H "5 c* « Decrease. 53 DIAGRAM NO. 7 . — INCREASE IN INCOME FROM VARIOUS CLASSES OF BUSINESS. 54 55 DIAGRAM NO. 9 . — DECREASE IN INCOME PER KILOWATT HOUR SOLD. EXPENSES FOR THE YEAR 1911. The Company’s figures as on the books showed a total charge for shrinkage, storage and adjustment of coal prices of $235,- 160.57. Owing to the fact that no survey of the coal pile had been made for a longer period than one year, part of this loss was clearly chargeable to the expense of prior years. In adjustment of these figures an average loss per ton for the five-year period preceding was used in determining the allowance for the year 1911 of $137,052, which is believed to be a fair amount. The Commonwealth Edison Company in the conduct of its business contracted with certain mines in the southern part of the state for a fixed percentage of the annual output of these mines. This contract was made in order to protect the Company in the event of coal famines as well as a further protection against high prices in case the coal market became overbought, which would place the Company under considerable expense to supply its regular demands. Provisions of this contract make the Company responsible for 50 per cent of the losses sustained by the mines in carrying out the coal supply agreements. This loss during the year 1911 amounted to $53,164. While the amount of loss has been included in the 1911 expense, it is questionable whether the Com- pany will in future be benefited to the extent of this amount, inas- much as the Company is now protected under active and pending contracts to the extent of coal necessary to produce about two- thirds of its output in case of increase of coal prices. PURCHASED POWER. While not a necessity for the Commonwealth Edison Company to purchase power on account of insufficient plant capacity, it is deemed advisable by them to do so in certain instances, especially in cases where the continuity of service is thereby insured. Statis- tics of purchased power for the year 1911 are as follows : Cosmopolitan Electric Co Public Service Company of Northern Illinois (Blue Island Plant)... Mandel Brothers K. W. H. Maximum K. W. 31,315,648 7,054 376,445 1,750 306,100 270 Sixty cycle, three phase, 12,000 volt energy is purchased from the Cosmopolitan Electric Company on the basis of $1.25 per Kilo- watt of monthly maximum demand plus .5c per K. W. H. supplied. The maximum demand as established during any month be- comes a basis of the demand charge for the following month until a higher maximum is reached. The Commonwealth Edison Com- pany owns and maintains the transmission lines between its Quarry street plant and the Cosmopolitan Electric Company’s plant. On account of the smaller size of the latter plant (14,000 Kilowatts) the investment per Kilowatt is somewhat higher than in the case of the Edison Company’s plant. The primary charge paid by the Edison Company is practically that at which it furnished energy during 1911 to its railway and bulk supply customers, in- cluding maintenance of transmission lines. The secondary charge paid by the Edison Company is .lc greater per K. W. H. than its receipts from most railway and bulk supply business. While the generating cost in the smaller plant of the Cosmopolitan Company is somewhat higher than in the case of the larger plant, the differ- ence would not be 25 per cent. The capacity of the Edison 60 cycle generating system is not sufficient to take care of its peak load, but there is ample additional capacity in the frequency changer sets located in various sub-stations, which can be operated from the 25 cycle system in connection with the 60 cycle generators to take care of the peak load without purchasing current from out- side sources. This method of operation would not increase the secondary cost of 60 cycle supply to the figure at which current is now being purchased. Thus the purchase of 60 cycle energy is not a necessity, but there are doubtless some advantages in having an additional source of supply to insure continuity of service. How- ever, in view of the generating costs in its own plant and the rate at which power is sold to bulk supply customers, .5c is considered an exorbitant price for the secondary charge, and for the purpose of this report has been reduced to .4c. Twenty-five .cycle, three phase energy is purchased at 20,000 volts from the Blue Island plant of the Public Service Company of Northern Illinois on practically the same terms as from the Cosmo- politan Electric Company over a transmission line to the Roseland sub-station, from where it can be transmitted to Grand Crossing and South Chicago sub-stations by tie lines. On account of the fact that these sub-stations are operated from the Edison Company’s plant over long lines of 20,000 volt cables it is deemed advisable to have this additional source of supply to insure a greater continuity of service, especially as these sub-stations also contain rotary con- verter units for railway supply. A small amount of 230 volt direct current is purchased from an isolated plant located in Mandel Brothers’ retail store at Madi- son street and Wabash avenue. While the Edison system is not lacking in capacity at this location, this energy is not purchased on unfavorable terms when it is considered that the supply is fur- nished only during the winter months when the heaviest demands are made on the system. The reduction of secondary charge to .4c per K. W. H. for current purchased from the Cosmopolitan Elec- tric and Public Service Company of Northern Illinois would mean a saving of $31,752 for the year 1911 and $39,265 for the year 1912. OTHER EXPENSE. In considering expense from the rate making standpoint, we believe that in some instances accounting which may be conserva- tive from the Company’s standpoint is not necessarily conservative from the consumer’s. This applies to purchase of materials or in- stallation of minor parts of plant necessary in furnishing service which have a longer life than one year and which are not con- sumed in furnishing such service within the year. In other words, the charging of the entire amount of these expenditures to the expense of any one year would mean that the consumers during that year would pay part of the expense of furnishing service in ensu- ing years, and if that year’s expense were used in determining future rates, such rates would be excessive. This condition applies to the installation of incandescent lamps, Tungsten fixtures and posts, which under the present prac- tice are charged to operating expense together with their renew- als. Inasmuch as abnormal operating expenses may result under this method because of a large increase in connected load during the year, capital account under the heading of Unclassified District Installations has been increased by the amount of such installation since Sept. 17, 1907, and operating expenses for the year 1911 de- creased by the amount charged during the year. An allowance has been made to provide for depreciation of capitalized items except where such depreciation is met by renewals charged directly to operating expense. In examination of revenue accounts it was observed that an item was deducted from light income as representing advertising privileges received. In arriving at our advertising expense this item was charged and the amount restored to revenue. Under the heading of Advertising certain donations made dur- ing the year were charged. Not believing that the consumer should sustain these contributions (which had no relation to' the service of furnishing electricity), but that they should come out of the Company’s profits, these items have been rejected from Advertising Expense. In Capital Account certain items of real estate are re- jected because of their apparent non-use in Company operation, as shown in table No. 7. Accordingly the expense of these items has been adjusted. The Company in its operation requires the use of electric and gasoline delivery wagons, trucks and passenger conveyances, for the use of which each department is billed according to its de- mands. During the year 1911 the total expense of the transporta- tion department was $307,498, of which $243,522 was distributed among the departments as representing their demands upon the service. This left a balance of $63,976 undistributable. Of this amount $58,377 represented new equipment purchased, and inas- much as this equipment has an ordinary life of from three to eight years, this item was rejected from expense and equipment purchased since the date of consolidation, capitalized under the heading of Unclassified District Installation, the balance, $5,599, being charged under the heading of Miscellaneous Expense. An allowance for de- preciation of equipment is included in the annual depreciation allowance. Under the account heading of Interest, Discount and Exchange, the Company has charged the amounts paid for interest on prepaid stock subscriptions and interest on a real estate mortgage of $130,- 000. Inasmuch as these items are in reality a part of the return 59 on the investment to be allowed and correspond to bond interest and dividends, they have been excluded from expense. During the year 1911 the Company set aside $60,000 as a con- tribution to the Employes’ Pension Fund. This amount has been included in Miscellaneous Expense. In 1912 the company increased the monthly contribution from $5,000 to $6,000, making the total allowance in 1912, $72,000, which is shown in the detailed ex- pense statement of that year. In arriving at the total Capital Account, under the heading of Brokerage, discount on securities has been rejected as an item for capitalization. Allowing discount on securities is in effect is- suing them at a higher rate of interest than is indicated on the face of the security. Such loss should properly be distributed over the life of the security. From such figures as have been available it is estimated that on all bonds sold the company has not sustained an average loss of over five points. This on $32,000,000, the pres- ent amount outstanding, would be $1,600,000, which spread over a period of 40 years would equal $40,000 per year. The company is writing off $39,114 per year, which has been allowed in the ex- pense as approximately the proper amount. Examination of Company’s payrolls shows that salaries and wages are not excessive for service rendered. Tables Nos. 10 and 11 show revised expenses for the years 1911 and 1912. TABLE NO. 10. TOTAL EXPENSE (EXCLUSIVE OF DEPRECIATION) FOR THE CALENDAR YEAR 1911. 60 W 2 t-,2 Q o fl o ® 02 F4 co s>:ii« M M •o . “ • 8 .S^gH | S? S3 ^ o CO IO CO I 054 " 5 Ol (M _ ,.?OH Q P | ce * ®i a ® Ph § ^ gw 53 | -a £ a X g 2 w 2 33 -.33 2 «« *S*P« 3 I mOOOUoO ^ cp ^ Jh o> p , kh _ « &o£; 05 3 S «j 2 .2 ?* S S§jS» « . OP'COC^ CO l_0 ic O 1 - l'- ISsISi 3 © © 3 3 5 I © ) •■* i>- I T* 1—1 ' © © SSSfcSS OOO'* .‘ft 30 rH ftg rH to J.-- CO lO CO coiooOcoOh S S O Jo ^ sWfeSga CO T— 1 €©■ €e- ts ftS S3 S g 5 ^P4 ce M a rn 5g|So Sj s S2t£ §S«°g2 SE^sg® I SS8 a 2° § gg§2°g £"1 ?? P ? c» i*e3 *11 ^ q 0 a os su n a a i— i CS c? 03 57 T. NEW BUSINESS— Contract Department Expense $ 200,642 . 2.86 . 028016 . 031334 ■ Advertising 226,550. 3.23 . 081633 . 035380 Wiring and Appliances 20,700. .30 . 002903 . 003247 61 < Ol csj O 00 Ol I > C5 co 05 i - O co I co >£KS3S?SF 8 ;©S§888 3 LO i §li in § i!3335g fe $ «HpHHQ0eoif)00HU5 £gg|SS?Sg f coSfe 8 © iis i 0080000 8 ggggggggglg ■H I 5S 1 8 qOr-i»LQ-^O 0 ©f>iC 0 ©© 1 m SooooiHco^-rsoo'OH in CO LO rH HHHCM O in © co cm I ?& w £ X !2i ! gs^i 0-glf! mi © © iC -* co © ip oo in in -mi © ■M' © COO5HN0OO5IS ninco©o©'^co in © in © co t-i m ih K CO S §8 3 f^S? * S' « § 1 1 R 8 8 8 a rH CO rH rH — CO- 6^ 6©- Pl cu PS fl o « « ft o oj O Is M SJ Sou ■e ft q .2 O ; a i S SO a £ CL 5j ft ft '.a s _ o 2£ O- ■ So opp^ft ps .5, R Q ^ a q §« *§ •« il Ph 5'S^^bOpl+o r-rl n ,” OJ |j fl O) Qj P5 WFEhPhWOX F = » fl,° 0 t;s5Jo W f op§ 1 S is a R ® tO-P s-. a a ° ^ ® * S £ fcUD ' ' . S q _ r? a ; c £ ; » a o 03 , 1! lbs; J® A(J5 I CO I s CO 03 in Q (X) £- I I go © ?o 3 § 838 £ O I* 1 g’g&l SS-eS § % rj) ~ ©pH«H a- ° . be a< a -a I s»a«d) ^§w§.s| ^ 'S *5 "S tf Ph aS'c a x c3 a; x; "S&iS lo-°l 3 tS 8 S &§««£ ft '42 os q „ S3 be oj j_. a> m 2 a 5 oj "2 o 5 m i 9S xn H fl _ 'Sill sg^sf*! §a S 2|g hiBClpq I O ® O z Si «J w ~ «« x s q a o o q 2 ®SB + ‘ S h § S S gjj% slll'isl *—< »w CC X q , r, o o < li: £j w - g©i2 | 8 8©§8d8 O rH ©go *S 8 IQ GO UO © ® CO in 1~ © © Q5 © CO rH S oi ^ &1 NiOM ' CO is° €©■ «©■ e©* 5 it cc S 1 S ft be'g 5 ^.S § CO C.J 02 6 £'-p be £ fe h ^ a >P "A q 13 § « a | a S. 63 to CO ^ < Ills on^rHlOt- 00 rH rH 00 • a> G tn • w . ‘sa -a 1 ll-.a s x H o? g ^P BilgiS « a IS pi! 3 .a o * © « a "S 2 a tuo a 1 !! Ia -2 OOl 3 wo HCO?S §®0 &S 8 J lA r-I i A3 r-H ' Oi cO O 06 S^j tf3 lA O0 ] P V §l| °^ § 04 ) CO * 9.2 g bjO«£H £ a 'o O x a* § Sr-.H a-S Q £ O -g 95 fc ” 2 aisles nijOCu « i^iij :«as: Hi O rSr-l, - a h h h t; 2 — , oj tun o i 5 53 os (2 47 H p. g O to oJCCO as « K — § w a S V a * K .2 § p-| G (^) «r-H £ a § ' s 'E p S Sfi S- 5 f S'SS^ X ® a I , a I Or-, ^ g g jsg o i § § o fc Is « < a«Sfi HH 3 SB'S® •g«! 9 a 6 _, El, ° “2 S a i-h + r° fl -gg S $ 4 > 5 sQ S h o a a ® -5 p 5 .a ss % PigoSE-i^SkkPffl a a a p a g-o 64 DEPRECIATION ALLOWANCE. As explained on page 35, depreciation is dependent on wear, natural deterioration, inadequacy and obsolescence. Other factors which sometimes operate to depreciate certain portions of an elec- tric lighting system are municipal regulations and improvements. The municipality may extend the limits of underground distribu- tion, order the removal of electric signs or private street lighting fixtures, or by the construction of a subway system or similar muni- cipal improvements, require reconstruction involving a large ex- pense. While the investor who risks his capital in the electric light- ing business, as in any other, must take some chances of loss oc- casioned by unforseen circumstances, it is only fair that his in- vestment should be protected to a reasonable extent against prob- able heavy demands in the future. In order to reduce such risk and maintain fair and uniform rates it is now customary to provide a fund to offset estimated future as well as present depreciation. Therefore, in order to do justice to the investor as well as to the con- sumer, who would object to having his rates raised whenever it be- came necessary for the replacement of an extensive portion of the plant, it is obvious that a portion of the earnings should be annually set aside as a depreciation reserve. The creation and administration of the depreciation reserve has been a subject of much discussion by public utility operators and economists. Generally it may be stated that there are three principal methods or policies of handling depreciation from a com- pany’s accounting standpoint. First : To charge to earnings in good years and credit to de- preciation reserve such amounts as the profits from operation per- mit. Second : To charge to earnings the depreciation as it ma- tures and necessitates renewals. Third : To charge to earnings and credit to depreciation re- serve annually a certain percentage of the cost determined by the average weighted life of the property. The tendency of all companies is to use the first method, because its practice aids in maintaining regularity of published earnings and dividend distributions. This writing off of an arbitrary amount at any time, depending upon earnings or financial requirements, is a poor policy from the standpoint of rate regulation, because it does not express true conditions and is susceptible of being used to create hidden assets or neglect the liability of accrued deprecia- tion. The second method is the improvident practice used by many companies, in former years more than at present. Inasmuch as it neglects providing for the old age of the property, it is equivalent to returning to stockholders as dividends the capital they have invested, thus placing the company in a position when the prop- erty has deteriorated and consumed its capital, of requiring new funds for rebuilding, and as a consequence over-capitalizing. 65 In general accounting practice, and particularly in rate regula- tion, an average annual depreciation allowance, based on the orig- inal cost of the property less salvage or junk value, spread over a period of years approximating the weighted life of the plant, is considered proper. If depreciation is considered in its broadest sense to include the maintenance which is charged to expense directly, it would be proper to set aside as a reserve a fixed percentage of the decreasing value of the plant to represent the unmatured decadence. This ideal situation would equalize the total burden over the life by making the depreciation allowance largest when the repairs are smallest, and conversely the depreciation allowance smallest when the re- pairs are largest at the end of the useful life of the plant. If the system were composed of many small units not requiring renewal at or near the same time, no special depreciation reserve would be necessary, as all replacements could be charged directly to operat- ing expense, because of their inconsiderable amount in any one year. This condition exists in large railroad systems where the principal depreciable investment consists of thousands of small units of rolling equipment and a roadbed sufficiently extended so that wear is distributed and can be offset by continuous repair. In the electric lighting business, however, a considerable por- tion of the plant is composed of large units which the rapid devel- opment of the art and growth of business render inadequate long before their natural life has expired. As a result of and to provide for this condition, depreciation reserves are accumulated, either on the straight line method, which is determined by dividing the orig- inal cost less salvage by estimated life in years, or by the sinking fund method, which consists in laying aside a certain annual amount, which with the accumulated interest would at the end of the estimated life equal the original cost less the salvage value. The sinking fund method has been used in this report, for the rea- son that an actual amount set aside and not disbursed in dividends should earn interest, regardless of whether the cash so retained is considered as a trust fund and invested in securities, or used in the conduct of the business by the Company itself, in iieu of securing or borrowing additional funds and paying interest thereon. Table No. 12 is calculated on a 3 per cent sinking fund basis. The percentage of original cost set aside annually for depreciation from all or- dinary causes, together with the estimated salvage value and life of the various classes of property of the Company are set forth therein. Calculated on this basis, the average weighted life of the Company’s depreciable property is 18.52 years. The table also shows the figures used by Bvllesby & Company in the Company’s appraisal, calculated on a straight line basis and making no allowance for estimated future, obsolescence or inad- equacy. The amount necessary to set aside for depreciation during the year 1911, based on the above table, is $1,987,252, the detail of which is shown in table No. 13. Ordinarily the Company does not estimate the amount set aside for depreciation on a basis similar 66 to the above, but charges over a short period of years, and to the current year if possible, replacements as they are made, but in addition to this creates a depreciation reserve of $17,000 annually for each one million dollars of bonds outstanding. It is a rule of the Company to charge to depreciation, only cost less scrap value of investment which is replaced by improved or more efficient apparatus, other renewals being charged in operating expense to maintenance. However, practically all renewals during recent years have been charged to depreciation because of the continuously changing type of investment. The renewal of poles and other over- head construction, iron pipe conduit, etc. (items which apparently have reached a standard construction) , are charged to maintenance on the basis of the Company’s present practice. In calculating the allowance for depreciation for this report these items were in- cluded because of the fact that during 1911 there was practically nothing charged to maintenance on the Company’s books on this account, due to the comparatively new construction of this part of the system. Inasmuch as the above mentioned depreciation allow- ance is used in preparation of a basis for rate determination for future years, it is considered fair to allow therein for replacement of all depreciable property. This allowance of $1,987,252 can, therefore, be designated a renewal as well as depreciation allow- ance. For future rate regulation it would be desirable to have a more detailed separation between repairs and renewals in the Company’s accounting. 67 TABLE NO. 12 DEPRECIATION. USED IN COMPANY APPRAISAL. , — Straight Line Basis. — , Net Deprecia- Life. Salvage. tion, % USED IN THIS REPORT. 3% Sinking Fund Basis. Net Deprecia- Life. Salvage, tion, % UNDERGROUND SYSTEM— Conduit, Tile and Stone. n 100 1.0 47 1.0 Conduit, Iron Pipe 30 3.33 13 6.4 Conduit, Dorset 25 2.7 Conduit, National SSYs 3. 25 2.7 Conduit, Pump Log 18 4.3 Conduit, Lithosite 331/a 3 ." 25 2.7 Conduit, Fibre Pipe 331/3 3. 20 3.7 Conduit, Waukesha Pipe Line 25 2.7 Conduit, Francis 100 1.’ 47 l’.O Manholes 100 1. 47 1.0 Edison Tube System 29 11.45 3.05 17.5 10 4.0 Cable Distribution System 50 52.67 .95 19 50 2.0 25 Cycle Feeders ( 9,000 V.) 50 56.31 .87 17.5 40 2.65 25 Cycle Feeders (20,000 V.) 16 30 3.5 60 Cycle Feeders (12,000 V.) 50 45.32 i!o9 17 40 2.75 60 -Cycle Transformers 26 16.55 3.34 16 15 4.2 Tunnels 100 1. 47 1.0 OVERHEAD SYSTEM— Poles 15 15. 5.67 14 15 5.0 Arms and Pins 12 8.33 11 7.8 Insulators and Pot Heads . 20 5.0 .19 4.0 Wires and Services 12 39.32 5.06 12 39 4.3 Lightning Arresters . 8 12.5 8 11.2 Line Cut Outs . 10 10. 8 11.2 Ground Connections — 15 6.67 14 5.9 Transformers . 25 9. 3.64 16 ’9 4.5 GENERATINNG STATIONS— Building Harrison Street 150 .67 35 1.65 ^Building Washington Street 150 .67 35 1.65 Buildings, Other Stations 150 .67 40 1.33 Cranes 50 2.00 40 1.33 Coal Bins 35 2.86 1 Coal and Ash Handling Machinery 1 Boilers 30 3.33 1 Stacks . 30 3.33 1 Breechings 25 4. 1- 15.5 4 5.0 Pumps and Heaters 35 2.86 1 Piping . 30-35 3.33-2.861 Turbines, Engines and Generators 35 . 2 . . . 2.86 Switchboards and Wiring . '50 2. J SUBSTATIONS— Buildings .150 .67 35 1.65 Irremovable Investment on Leased 'Prem ises • .150 .67 16 5.0 Rotary Converters . 45 10. • 2 - 1 Motor Generators . 36 10. 2.5 I Oil Switches 22.5 10. 4. L 18 10 3.8 Transformers and Regulators . 22.5 10. 4 - | " Switchboards and Wiring . 45 10. 2. I Miscellaneous . 20 5. J Storage Batteries 18 10 3.8 MISCELLANEOUS BUILDINGS— Adams Street Office Building 30 2.1 Miscellaneous Buildings 25 2.74 Signs . 25 4." 6 15.5 Meters (Customers) . 66.7 1.5 16 5 4.7 Arc Lamps . 33.3 3. 10 8 8 . Horses, Wagons, Autos, Miscellaneous. 7 5 12.4 Incandescent Lamps Renewals charged to Maintenance. Free Wiring 4 23.9 Tungsten Posts and Fixtures 4 23.9 * Now used for laboratory and repair shop. 68 TABLE NO. 13. ESTIMATED ANNUAL ALLOWANCE FOR DEPRECIATION FROM ALL CAUSES FOR THE YEAR 1911. Annual Depreciation Allowance. Per Cent of Original Cost. Per Cent of Present Value. Generating Stations — Harrison Street $ 129,505 3.91 5.17 Fisk Street 350,389 3.67 3.85 Quarry Street 195,810 3.89 3.98 ^Washington Street 5,966 1.71 2.22 •59th and Wallace Streets 24,051 3.43' 4.32 Substations and Substation Buildings 190,066 3.28 3.49 Adams Street Office and Miscellaneous Buildings 18,686 2.31 2.59 Storage Batteries 95,910 3.80 3.97 Conduits and Tunnels and Underground Lines 397,396 2.43 2.75 Overhead Lines and Line Transformers 198,075 4.83 5.57 Meters (Customers’) 172,935 4.70 4.95 Signs 43,781 15.50 17.18 Arc Lamps 12,946 8.00 10.08 Unclassified District Installations, including horses, wagons, automobiles, furniture, movable tools, laboratory equipment, repair shop equipment, in- candescent lamps, tungsten fixtures and posts, and free wiring 145,736 8.64 13.27 Total, including Real Estate $1,987,2152 3.45 3.81 Total, excluding Real Estate $1,987,252 3.63 4.04 * Now used for laboratory and repair shop. RATE OF RETURN. In a number of water supply and railroad rate cases decided by the courts a rate of 5 per cent on the actual investment has been held not confiscatory. A rate which is not confiscatory does not necessarily mean a fair and equitable rate to the investor, but rather a rate which permits the existence of the utility. In gas, electric and telephone cases, 5 to 6 per cent seems about the minimum rate allowed by the courts. Public service com- missions have, in general, been somewhat more liberal than the courts and their decisions permit somewhat higher return on the actual investment tnan the prevailing interest rates. In the recent street railway case of The Milwaukee Electric Railway and Light Company, a 71/2 per cent rate was fixed by the Wisconsin Railroad Commission. The ruling of the Wisconsin and New York commissions in gas cases has been 71/2 per cent, and in electric and telephone cases 8 per cent. In no case has the property whose rates these bodies have regulated approached in size the one hereunder considered. Unquestionably capital can be attracted to large properties on more favorable terms than to small ones of proportionate value and efficiency, so that the rate of return need not necessarily be as high in the case of a utility like the Commonwealth Edison Com- pany, with fairness to the investor, as in the case of smaller prop- erties. Nevertheless the return should not be fixed so low as to retard the natural supply of capital necessary for future require- ments. A little consideration will show that the rate of return should be somewhat above the average interest rates on the high- est grade securities in order to attract investors and to furnish an incentive for developing the business, which in the end means good service to the consumer at a minimum cost. 69 Capital is doubtless entitled to returns commensurate with the risks incident to the business. The pioneers in the public utility field should have, and in most cases have received, returns largely in excess of what would be considered a fair return on these same investments today. But it should not be supposed that the early large returns should be continued when the development of the busi- ness, the elimination of competition and the necessities of the com- munity have largely reduced the risk of the investment. While the Commonwealth Edison Company can obtain a cer- tain amount of capital for its needs by issuing 5 per cent bonds, at practically par, it does not follow that this method of financing would be the most desirable to follow exclusively. In order to make a sufficiently good showing to enable these bonds to com- mand that figure, there must be a large equity in the property and the net earnings after all operating expanses and fixed charges are deducted, must be considerably in excess of the bond interest re- quirements. In addition, the management should be largely inter- ested as stockholders, i. e., owners, to assure best operation. From 1887 to 1889 the first two years of the Chicago Edison Company’s history, no dividends were paid to the stock holders. From that time up to the consolidation with the Commonwealth Electric Company the annual dividends of the Chicago Edison Com- pany were 8%. The Commonwealth Electric Company never paid any dividends during its life from 1897 to 1907. When the con- solidation went into effect Chicago Edison stockholders, for whom the stock of the Commonwealth Electric Company was held in trust, received shares in the new Company to the extent of 160% of their individual holdings in the Chicago Edison Company. This distributed the stock equity in the Commonwealth Electric Com- pany. Dividends were paid on the Commonwealth Edison Company stock at the rate of 5 per cent, until November 1st, 1908, when the rate was raised to 6 per cent., and then to 7 per cent, on May 1, 1911. As a result the stockholders in the old Chicago Edison Com- pany are now receiving 11.2 per cent return on the par value of their original investment, or an increase of 40 per cent. While rate regulation is of advantage to the consumer it is not embarrassing to the Company if properly handled. But if all profits above low interest returns on the investment in actual use were devoted to rate reduction, there would be little incentive on the part of the Company toward introduction of economies in opera- tion. After due consideration has been given all factors bearing on the question, a rate not greater than 7 per cent, seems reasonable as a fair return on the actual investment in this case. The rela- tive proportions of stock and bonds of the total investment is a factor which has a direct bearing on the question of rate of re- turn. Figure 10 is of interest as it enables the return on the stock to be seen at a glance when the rate on the whole property is known, assuming that the bonds bear 5 per cent, interest. 70 DIAGRAM NO. 10. IOO 90 ao 70 60 50 AO 30 20 iO °/o CAPJTAL REPRESENTED 5/ BONDS O TABLE NO. 14 . 71 NOTE — Figures in parentheses denote relative rank. 72 Table No. 14 sets forth the investment and earnings of the various local public utilities, as obtained from published state- ments. The amounts representing net income from operation are before interest payments and divisions of profits by ordinance pro- vision or otherwise. This table is included to furnish a basis for approximate comparisons of the different classes of business and to show the rate of return on the investment figures in the Com- pany’s records. Diagram No. 11 illustrates the variation in rate of return as shown by the Commonwealth and Edison and Commonwealth Edison Companies’ published statements. 73 PLANT INVESTMENT. SOME PRINCIPLES OF RATE MAKING. The Act of the State Legislature passed in 1905, conferring upon the City of Chicago the authority to fix the rates for the sup- ply of gas and electricity, specifically states that rates must be just and reasonable. The obligation resting upon any public utility corporation operating under a franchise or grant from a municipal- ity, in the absence of express provisions therein governing the same, is to furnish service to all of the inhabitants who may apply for it at reasonable rates and without unjust discrimination. The question of rates for supplying electricity has received much study by public utility operators and in general the rates employed are determined on a more scientifically correct basis than other public utility rates. This condition has been made impera- tive by entering a field apparently well covered by gas and the necessity of developing business along other lines than lighting. Electricity cannot be economically stored like gas and its use for most purposes is confined to short periods during the 24 hours and a large proportion of the consumers make their greatest de- mands upon the system at the same time. For this reason the generating plant as well as the distribution system must be capable of furnishing the maximum instantaneous demand which is liable to be imposed upon it by the consumers and therefore the invest- ment must be as large as though the full capacity of the plant was utilized throughout the 24 hours. The annual load factor of the Edison Company’s plant (ratio of average to maximum) based on rated capacity is about 3114 per cent., which is considerably higher than that of most companies in other cities. As a result of the com- paratively short hours use of the rated capacity of the plant a large proportion of the total expense of furnishing the service consists of interest, taxes and certain expenses, which remain constant regardless of the amount of electricity supplied and the resulting income. It is readily seen that for a rate schedule to be just to all users, regardless of the number of hours of service they demand of the plant, the fixed costs should be so incorporated in the rate schedule that every consumer pays fixed charges as well as the operating expense on the investment which his service requires. As an example, if one consumer has 20 lamps, all of which are used at one time, he should pay four times as large a fixed charge as one who uses only five lamps at a time, because the invest- ment required by the Company to furnish the service is approxi- mately four times as great. If the rate for electricity was a fixed amount per unit of consumption, then the first consumer might use his lamps one hour per day and the other burn his lamps four hours per day and the resulting bill would be the same in each case. One consumer pays as much as another although the amount of investment required in the first case is nearly four times as great as in the second. Thus it is seen that the flat rate per unit of consumption discriminates against the consumer who makes the greatest use of his demand upon the system. There are five methods in common use in the United States for determining the charge for electric service. Flat Rate Per Unit of Connected Load : This is a relic of the old method of charging for water by assessment or frontage basis and is not suitable for electric rates except in special cases of hydro-electric plants where the operating expense is a very small proportion of the total cost of service. This system is not always economical for water supply systems. Flat Rate Per Unit of Consumption : This method corresponds to the system generally adopted of charging for metered gas, water, etc., and for electricity is gener- ally a more equitable method than the one above mentioned, but is open to objection because it discriminates against the long hour consumer, as explained above. The Wright Demand System : Under this method a certain primary or high rate is charged for the first hour’s daily use of the customer’s maximum demand and a lower or secondary rate for additional use. The primary rate is sometimes applied to a fixed number of hours’ use per month of the maximum demand. The Hopkins on System : This consists of a fixed charge per unit of either connected load or maximum demand plus a kilowatt hour charge for the current consumed. The Doherty System : This method imposes first, a monthly fixed charge for all customers regardless of the size of their installation or current consumption. This charge is to cover meter reading and main- tenance, accounting, collecting and all other expenses which are practically the same for all customers. Second, a charge deter- mined by .the customer’s connected load or maximum demand. Third, a charge per kilowatt hour for current consumption. This system is theoretically the most correct, but lacks the simplicity of the other methods mentioned. Various combinations and modifications of the above outlined systems of rates have been provided for special cases. The Wright Demand System has been employed by the Commonwealth Edison Company for retail lighting and power since 1898. The Hopkin- son System is used by the Company for wholesale light and power and for railway and bulk supply customers. For further reference to the application of the Wright Demand System of charge is used by the Commonwealth Edison Company, see appendix. Rate Schedules. While it is impracticable to calculate the cost of serving each individual consumer, the cost of supplying some classes of con- 7G sumers under the average existing conditions can be approximated. Some of the varying factors which introduce complications in cost figuring are character of installations, ratio of maximum demand to connected load and to average load, time of day and of the year on which the maximum demand occurs, diversity between consumers of each class and of different classes. Many of the factors entering into the cost of supply are of such a character that it is difficult to apportion them to the different classes of consumers as they are determined by the Company’s business as a whole. The Company must so fix its rates that the total revenue is sufficient to provide for operating expenses, fixed charges and a profit on the investment. In making rates for large consumers the Company is limited by the amount it would cost the customer to supply his own service, or, in other words, the large consumer might be considered a competitor of the Company for his own business. While a much higher rate could be charged the small consumer before reaching a point where he could afford to furnish the service himself, the rate is to a certain extent regulated by the cost of other forms of illumination or power. In establishing rate schedules which are fair to the public, and which will result in the maximum revenue to the Company, there are certain fundamental principles which should be ob- served : \ First: Classification of rates should be based on differences in conditions of service. Second: The rate for each class of service should bear a reasonably close relation to the cost of serving that class. Third : Some individual consumers of each class may be served at a loss but the class as a whole must be profitable. Fourth: Any rate must not be greater than it would cost the consumer to provide equivalent service from other sources. Fifth : Any system of rates must conform to commercial re- quirements in order to attract and hold business and bring a rea- sonable return. Sixth : The various rate schedules should be as simple as possible, so that they can be understood by the consumer to whom each schedule applies. Seventh : Although special classes of business should be sought after if profitable, the service should not be unjustly dis- criminatory in relation to other classes. DETERMINATION OF FAIR MAXIMUM RATES. The cost of supply to consumers paying the maximum rate cannot be directly determined with sufficient accuracy to obtain undebatable conclusions with the data available, as will be shown later. It is, therefore, necessary to investigate rates other than the maximum to such extent as to demonstrate that they do not shift an unfair burden upon consumers paying the maximum rate, resulting in unjust discrimination. A proper consideration of all of the factors will then enable fair maximum rates to be deter- mined. 77 Reference to table No. 8 indicates that over two-thirds of the Company’s output for 1911 was furnished to railway and bulk supply customers, and brought a revenue of less than one-fourth of the total, thus indicating that the cost of supplying this busi- ness should be investigated. WHOLESALE RATES. The obtaining of large wholesale and bulk supply business is advantageous to the Company, not only from the standpoint of increased load factor (ratio of average to maximum load), but on account of the relatively small amount of general expense involved and also in that contracts for this business usually cover a long term of years and provide for a fixed minimum charge, protecting the Company in the necessary investment. As these contracts are based on a maximum demand, the consumers endeavor to keep down their peak loads, distributing the use of current over longer periods and automatically improving the load factor, thus tending to reduce the total investment as well as the production cost per kilowatt hour. The reductions in retail rates during the past years in Chicago have partially been made possible by this business as it has enabled the construction of mammoth generating plants and distributing systems at a lower unit cost of investment and operation. The Commonwealth Edison Company, by offering in- ducements in the way of special rates which had heretofore been regarded as unreasonably low has succeeded in obtaining contracts to furnish approximately 77 per cent, of the power requirements of the elevated and surface railway systems of Chicago. The oper- ating advantages of this business are well illustrated by Diagrams No. 12 and No. 13 which show comparative load curves of the Com- monwealth Edison Company, New York Edison Company and the Edison Illuminating Company of Boston. These diagrams are shown on the basis of the same maximum load in each case for the day of the greatest maximum demand for the winter of 1911-1912, so that comparisons can readily be drawn. They also show that the Comonwealth Edison Company’s load factor was 55.7 per cent, as compared with the New York Edison Company’s 44 per cent, and and the Boston Company’s 44.3 per cent. Ten years previous, when the Chicago Edison Company and the Commonwealth Electric Com- pany had no railway load, the corresponding figure was about 43 per cent. The New York and Boston companies have a small amount of railway or similar load, thus showing the advantages to the Chicago Company resulting from this class of business. Dia- gram No. 14 shows the increase of annual load factor (based on maximum load) of the Company’s system for various years for rail- way, light and power and total output. December 27th was the day of the maximum load on the Com- pany’s system for the calendar year 1911. Diagram No. 15 shows the railway, (which includes bulk supply) light and power and total output for this date, while Diagram No. 16 shows the distri- bution of total load between the different generating stations and the power purchased from other companies. These diagrams in- 78 dicate that the railway maximum load and the lighting and power maximum do not occur at the same time, resulting in a difference between the sum of the separate maxima and the total maximum which is known as the diversity and in this instance amounts to 3,740 K. W. In other words, if the railway load were supplied from one generating system and the lighting and power load from an- other, the combined capacity of the two systems would have to be 3,740 K. W. greater than when the supply was from one system only. DIAGRAM NO. 12 — COMPARATIVE LOADS — NEW YORK — CHICAGO. 79 The 15 minute maximum railway load for the year 1911 was 118,952 K. W. occurring Dec. 28th. The railway load at 5 :15 P. M. Dec. 27th, at the time of the maximum load on the system for the year was only 112,120 K. W., the difference, or 6,832 K. W. being the diversity between railway maximum and total output maximum for the year. The 15 minute maximum light and power load for the year was 98,003 K. W. occurring Nov. 28th, but on Dec. 27th, at the time of the yearly system maximum it was only 85,650 A. M. PM u 1 4 6 a 10 12 2 4 * 6 8 10 12 80 K. W. the diversity being 12,353 K. W. in this case. The grand total of diversity between the railway load and lighting and power is 19,185 K. W., representing a saving in investment of approxi- mately $1,500,000. The corresponding figure of total diversity for the winter of 1911-12 is 22,991 K. W., meaning a saving in gener- ating station investment of about $1,800,000. The economic ad- vantage of one electrical generating system for all classes of supply is thus evident. Corresponding diversity exists between lighting maximum and power maximum loads, but it cannot be readily determined. Diagram No. 17 shows the railway, light and power and total output on July 17th, 1911. Diversity between light and power and railway in this case is much greater, as the railway peak load comes between the power peak and the lighting peak. The lighting and power peaks are very nearly coincident in winter, but are separated in summer. During the year 1911 power supply for surface and elevated railways was furnished at 9,000 volts, 3 phase, 25 cycle, to sub- stations within a radius of approximately 10 miles from the Fisk Street Plant and at 20,000 volts to substations at a greater dis- tance. The transmission system is owned and maintained by the Commonwealth Edison Company, but current is metered at the generating plant. The Company does not furnish, maintain, or operate transforming substations and apparatus except for the DIAGRAM NO. 14. — SHOWING INCREASE IN TOTAL LOAD FACTOR CAUSED BY RAILWAY LOAD. 81 DIAGRAM NO. 15 . — MAXIMUM SYSTEM LOAD — YEAR 1911 . DIAGRAM NO. 16 . — STATION LOAD DISTRIBUTION FOR DAY OF MAXIMUM SYSTEM LOAD — YEAR 1911 . DIAGRAM NO. 17. — LOAD CURVE FOR TYPICAL SUMMER DAY — YEAR 1911. supply of current to the Joliet Lines of the Public Service Company and the Chicago Tunnel Company, which latter is metered on the high tension side at substations and is transformed to 250 volts direct current. In the Plymouth Place, South Chicago, Grand Crossing, Roseland and Troy Street substations of the Common- wealth Edison Company, the Chicago City and affiliated railway Companies have transforming and converting apparatus for rail- way power. The railway companies pay interest, insurance, depre- ciation, maintenance and operating charges for the proportion of these substations which they occupy in addition to the charge for power. This amount is billed separate from the power charge and appears on the books of the Commonwealth Edison Company as a deduction from substation operating expense, and therefore is not charged against the cost of railway supply. Sixty cycle, 12,000 volt, 3 phase bulk supply energy is furnished to other electric com- panies. The statistics for railway and bulk supply power for the calendar year 1911 are as follows: 83 25 CYCLE. One Hour K. W. Max. K. W. Hours. Chicago & Oak Park Elevated R. R 5,070 15,818,260 Northwestern Elevated R. R 6,200 19,700,747 Metropolitan Elevated R. R 6,600 12,748,820 Chicago City Railway 47,482 181,482,089 Chicago Railways Company 53,520 198,552,856 Public Service Co. of Northern Illinois, (Evanston) 2,520 5,766,592 Total of above. . . 121,392 434,069,364 60 CYCLE. Maximum K. W. K. W. H. Public Service Co. of Northern Illinois (Maywood) 815 (1 Hr.) 59,889 Public Service Co. of Northern Illinois (Joliet) 2,280 '(% Hr.) 4,729,740 Cosmopolitan Electric Company . . 152 Hr.) 356,396 5,146,025 250 VOLT DIRECT CURRENT. One Hour K. W. Max. K. W. Hour. Chicago Tunnel Companv 1,105 4,212,711 Total railway and bulk supply. . . . 443,428,100 The amount of investment in generating stations required for this business is determined by the load at the time of the generating station maximum for the year which was 197,770 K. W. on Dec. 27th, 1911, between 5 and 5:15 P. M. as shown on diagram No. 15. The Railway Load at this time was 112,120 K. W. or 62.86 per cent, of the Quarry and Fisk Street stations load and the rail- way and bulk supply business is accordingly charged with that proportion of investment in these stations. Since the acquisition of this business was predicated on the construction of new gener- ating stations with very large and highly efficient units, the cost of this business is not properly chargeable with any portion of the investment in old equipment. The economies of these modern plants are shared by other classes of business which are not of sufficient magnitude in themselves alone to warrant their con- struction. The investment in underground cable chargeable to this business is readily ascertained, as in most instances a separate transmission system is employed. Underground conduit is charged on the basis of cable mileage at a unit figure corresponding to the latest type of construction. Substation investment is determined by the maximum requirements of the Chicago Tunnel Company and the step up transformers necessary for supplying 60 cycle service to the Joliet lines of the Public Service Company of North- ern Illinois. Transformers for the 20,000 volt, 25 cycle railway supply are included in the generating station figures. . 84 ia 05 H a G £ H a < o a HJ H OS O a Pt5 H S O H X P U J W D £ w 2? g . M «K 1 — I KH O pH L_j 00 -9 *>4,1* SMoO ' •* x a M 'C “ij > T3^gW 'J II 53 II, ■ r w .3go£ !£“ . « 53 _.• *•9 S-M *2 fcsSj m £ a cs 00 CO CO 05 i— I SSS83S 88! WtQ^OlCOi 00 N Cl (N 05 1 So a> a ~ CO (15 l|l. S5 r ^Hfl W l^i 05 611 . S S-oSft 1 5 S3 ’3 ,3 63 p, a « OH ^ cl 53 g~-|P«H ES , So aT ft— ° P cs w a,^ oj Pi >P fl p 5 « g ®cc 53 g X3 K »I S _g S « Slillf ocPajpp^p Hgfl 03 os £ ra hP fl 2 H +? ffl ft 0 t-l g “co g 0j am 5 fl to a a o ° cs p CD O © O o o a a'h flqc2°a C3 C3 C3 q j J> | .§ g ■§ .s.a.s s s a SSsfsS §S1^ P a >'E £ o«;£ JZJ Total Utilization 85 (N (N(MH CJCO I Hill ' q5 < S8: 88 jgwocg cc> in so co eg •** fra«N oofe^S • fio^ & .9 a : a &t : b S R 1 :* 3 H W >3 ... s s slip m „ s ^ rvj 'OSWf p ^ d V, 9«2 S gS?S| „ _ j!|I | SSHSB -O Is LQ LO IO Lfi 5! o 8 §6 55 p o S a; p H O « « S &§gj§ t L S O' fg 2 o a « « £;+*(-) q. w ' J. r/'l '*■"' 5“** $H fl} g i a , Ss p .9 -r ^ *£ 2 « $ -gS ’g.-g q qPn «5 a '5o P 43 o S fl i a; tH ^t-as 888= '5 q ^a q a? O) I a A, t: q cSE ft C3 Residence Commercial General Large Light. Light. Power. Users. Between consumers 3.35 1.46 1.44 Between transformers 1.3 1.3 1.35 1.15 Between feeders 1.15 1.15 1.15 1.15 Between sub-stations 1.1 1.1 1.1 1.1 Consumer to transformer. . . 3.35 1.46 1.44 Consumer to feeder 4.36 1.90 1.95 1.15 Consumer to sub-station 5.02 2.19 2.24 1.32 Consumer to generator. ; . . . . 5.52 2.41 2.46 1.45 In these figures no account is taken of the efficiency of the different portions of the system, for which allowance must be made in their application to determine investment. It will be noted that diversity exists between all portions of the system, not only between consumers on the same transformer, but between transformers on the same feeder, between the different feeders from any substation and between substations themselves. Except in the case of residence consumers no more recent figures are available. Data obtained in December 1912 in the case of one large group of residence customers shows that the diversity factor between consumers has decreased from 3.42 to 2.85 which might be explained by the average increased use of electricity. It is probable that the diversity is somewhat smaller in the direct current district on account of being more closely built up, requir- ing greater hours use of current for lighting. It is not considered that sufficient data is at hand to determine with great accuracy the investment for these different classes of service, but calcula- tions based on these figures have been made as showing approxi- mately the present conditions. It has been found that the month of October represents very closely the yearly average for consumption of electricity, and ac- cordingly the following summary of lighting and power statistics by rate schedule has been obtained for October 1911. 88 a* 05 H CQ O H O o of w J p Q W W o M H H 05 CQ 05 W £ o Oh Q £ C Eh ffi O 3 fc o 05 < *»M uB ◄ M o e 3 *t-< 3 « O°S0 W J*£ ^ S* Sfcfc 3PM g *£ ^ 52 |mq . ! QP qp BuB OfO O^+H s I Os Pt s;< .|£|£ W* M o 3 K I «£ I Otai S °6 3 *£ O 0+J © MNIOlftOO g SBgggS 8 | 5 j $ $8 CO I ££882 i£> fr- *> r-i i>- gsssg co" 8 is" ©' co" OfflW cTo S^c^eo 1 S | c 7 I £r &SS 883 S lb i-H O >> £ >> fe *§ o > ^ jL o'c o S • in a > 35 P Ij o - x :.sg-s K ba •2 bo «H 23 fl a ■ ‘ M ft g> : a S «T.2 -il s O a/ « 4-* d ' -2» ° ts b ! 02 3 " JJ CC hn M s; 6 c pj .S o 30 ss o, ®5 S *£ cd QJ j ."Si £ .by w . P ^ 5 3 *-* w I o g fc H fc g S o 3 g ClS“ _ _ w o a > Joo ‘«K ! s s r ?“ cs cs 3 -5 05 O PM §s§ 8 fe| .co r .2 S § S PM jb 15 ° O o Fh a i Si. V 88 « o ^ CO Hi M* si ss 88 1 a ^ • i ; ON w iS • • i 00 88 I-H ] :§8S8 II 1 *• 88888 1 S r -1 iQ oc I> to 00 1 ^ to IQ CO 'H* ^ $ 03 o4 SO t-i rH r-i r-i r-i O > fiftS tjos £ _ 2 aa«§2 S S o«„« 5! ^ *-> © 03 t, 02 ^.Q O £ ^ = ±2 « C PS §02 02^1— © c „ 61) ^ — S a « 2 * eh s 8 .id <§J • 05 05 S, '-S'* ' • t> cS 03 ^ cS ( ^ e a :&g • d » © 6 O sffcfc d££ © © Ph ps fS O OPh o— . PhPh ©Ph * Pm Vi ^ © 5 © © O © CB « osis-ts 0 ft « w © 8 « G 8d4*38^8£8.K8g, !S8®Si88S«sl2S§8$£»SSg 2 W Pm ft «g {§<§>-#«* ""•W iO . £ W § b® 'o'S 73JS 03 -ft c3 3tKDtUl3 'C’S'O’S'C • «,c.axi • •o »o • -o . *oo .o •00 ■ Cb t- .00 • t~ * 1 ~ • t' © . o3 we- ft o OB Ph 03 © © ‘ • © 8 © §^33§SSSSSS'g3lI§SII§|§lSI§®5ss.82«sd«*|*^« "S'© © . © "© *© 8'-? Il|l|lill|li|il 1-OHft d o VI l~ CM C<3 CO • • o o • • ’§3 8 • • • O • O • P o • '• :§ :ds : • • T* 00 • • *IMH • : :§ :SS : 3 S 8 s 8 8 8 i i 8 1 8 fc i% I s s £ q $ q in d in Os ft 1 -h - co co in d ft d |S t~T d— T i-m oii-Nt-*® d ao d d I" i-’ ^©OlrlWQJ; »« g§s^ Ss“Sgfe3 , a'S Js8« ££d ; 3^ t £«lli.2 S«llg o « S « ft O O go ^5 O 0'S cQGPH3qPHCca2WPQ^i- s ^omQ3O0!KPHQQWP : )dPH0d^ to X) Pi X) * * 6 2 i» * 4 2 " • • -V-. 1 COMMON 1 WEALTH 1 LIGHTING -ERTR1N TV •0 with ROTE.! city or ci ■r ON ELECT EDISON CC RATES PICRL INSTI S OF 43 LRRi H 1C AGO. RIC RATES, l )MPANY =ILLRTIONS 6EST cities . 913 , r or c COMPBRf t REPOR 'X \ \ \ N **3 0 — '9 // s. \ / / / / >7 f-A/ / A7 c * 4-J C./T/&S * | 4 d i i * * t ------ i s «/ 0 c k 0 ! 0 * r 0 5 Mi r * £ * * k i * 0 0 ■4 M) - i 5 DIAGRAM NO. 18. — LIGHTING RATES FOR CERTAIN CHICAGO INSTALLA- TIONS COMPARED WITH RATES IN OTHER CITIES. \ NOTE— Below comparison made up from various published statements, supplemented by statistical data received from companies and applied thereto. 97 sS 2 a 05 II O iO : i 1885 8 S SS I Sff S ’ <5.1 IJ~ 65 c; MN W ^ S 888 wS NrHrl ; £ •SSSrH £> . . CO *c 8 : C£ LD Ci i ® fc s w • ueuB ^ 5 ci IC M W8 w ' eo ’ < *i 8 ; 1 2 1 • 88 1 R nr CO 53 33 S l8»St:: iISS 65 00 388 I gjf2g M* 3 I t-' 05 C 1- N c IOMH05 0(5 ■<£ •+ ! ^feggi 8 8 85 8 05 „ o II a r* W 0 sl t» 0 ag * S * 2 ^ S Mo o-2 a § u S'? ft i8a* ■I* c3 1 «h £ r* > a ^ © & R ft* 2 ' Oswc ° '■ U§*J,s. - B C ,Sc o iii 1 ^ 0 di ^ i: rj ^ ‘h P< o C MoOM55:c! -a c a; £ a 3 3 O 03 Qj w 3 o •— O -8 -8 g.S a bo 5 m & « 5 _ o 0>H H 0 o-g - o 05 M2 g* MW ll |mm gw Is *3 - g-sc OM 0 §§1 •g'S* Fi F a § H 5 «H 5- , a; qj MM3 ^ to S' P. •W ®s ® c -og 03 S 8 +* o o "" gg,| MOO T3 a S ‘S ssL- ° . O • C §^MWH pg^s = g | ft M ^ S ^ ll ft Es o t 2 x ® . rn O h o 3 W £ o rH P C« S g P5 3 gS S .V g^M 3 ^Mfe| 03 J-c ^’x 3^1S sis- § § fl o 5 £ .3 CO “ , ’ %>?&. 8* -1 ts Is £ a< , IP 5s 98 7_S,OOCJPOO *-50.000,000 AVERAGE PLANT real estate. *I5P0Q000 Jim *$000,00 300 » lull PLANT PEAL ESTATE ' ETC. ECESSARY TO PROODCt */S2 T INCOME 150,000 KW (OOjOOOKW 50.000 KW PER CENT E»»NEO ON pl amt peal Estate, etc I 111 eoooooooo AOO.OOQ zooaxjo.ooo DIAGRAM NO. 19. — GRAPHIC ILLUSTRATION OF TABLE NO. 19. Table No. 19 and Diagram No. 19 show comparisons between published statements of several of the largest electric companies, which operate on a generally similar basis. The figures were ob- tained from published statements supplemented by data furnished by the companies. 99 TABLE NO. 20. COMPARATIVE RATES FOR LIGHTING IN FORTY-THREE OF THE LARGEST CITIES OF THE UNITED STATES AND CANADA FOR 1911. , — -On Basis of — K.W. K.W.H. t -Cost in Cents Per K.W.H.- \ Con- Con sump- - Maxi- Aver- Mini- Chicago Chicago nected. tion. mum. age. mum. 1911. 1913. Ten-room dwelling . . . . . 2.30 625 12.63 9.39 4.43 8.87 7.82 Six-room apartment . . . . .45 192 14.05 9.96 5.18 8.77 7.76 Office . . 2.05 787 12.32 9.68 6.11 9.52 8.52 All-night lunch room. . . .80 2299 10.00 6.51 3.40 6.52 5.53 Drug store . . . . . . .70 3139 10.00 6.34 2.97 6.32 5.33 Retail store . . 3.30 1520 12.00 9.22 5.00 8.07 7.09 Saloon . . 4.10 6342 10.00 6.88 3.66 6.62 5.62 Printing shop lighting. .. 1.90 1278 12.00 8.87 4.98 7.92 6.94 Manufacturing lighting . . 4.50 2757 12.00 8.48 4.90 7.58 6.58 COMPARATIVE RATES FOR RETAIL POWER IN FORTY- THREE OF THE LARGEST CITIES OF THE UNITED STATES AND CANADA FOR 1911. r On Basis of \ K.W. K.W.H. r~ —Cost in Cents Pei ' K.W.H. \ Con- Consump- Maxi- Aver- Mini- Chicago nected. tion. mum. age. mum. 1911-1913. Printing shop 1.1 755 11.12 7.26 3.80 6.97 Manufacturing . 7.5 12589 7.32 4.43 2.06 4.44 HISTORY OF THE COMPANY’S MAXIMUM RATES. Lighting : The retail lighting rate of the Chicago Edison Company prior to 1898 was 1 cent per 16 C. P. lamp hour or 20 cents per kilowatt hour, less 21/2 per cent, discount for prompt pay- ment. In 1898 the method of charging was changed from the straight kilowatt hour basis to the Wright Demand System, which is the present method of charging, the rate at that time being 20 cents net for the first 45 hours’ use per month of the maximum demand in winter months or 15 hours use in summer months, p 10 cents per kilowatt hour consumption in excess. The secondary rate was allowed only in case of payment in ten days, otherwise the bill was rendered at the full primary rate. The minimum monthly bill was $1.00. In March 1903 the full rate charge for lighting was changed to 30 hours use of the maximum demand for both summer and winter months. The 43rd General Assembly of the State of Illinois passed an act entitled “An Act to confer upon the City of Chicago the power and authority to sell surplus electricity and to fix the rates and charges for the supply of gas and electricity for pov heating, and lighting, furnished by any individual, company or cor- poration to said City of Chicago and the inhabitants thereof,” which was approved on May 18th, 1905. On July 1st, 1905, the Chicago Edison Company made a vol- untary reduction in rates to 16 cents primary and 10 cents second- ary, net for prompt payment. The gross rate was 1 cent per kilowatt hour greater for both primary and secondary. . 100 In the Act above mentioned it was provided that the same should not be in force until the question of its adoption had been approved by popular vote, which was done on Nov. 7th, 1905. On Dec. 4th, 1905, the City Council passed an order providing for an investigation and report on reasonable rates for the supply of gas and electricity. This report was presented March 26th, 1906 by B. J. Arnold and William Carroll, City Electrician. The con- clusions of this report were that the Edison and Commonwealth Companies could afford to reduce their lighting rates. At the same time this report was presented to the Council, the Common- wealth and Edison Companies submitted a proposition that if they were allowed to consolidate under the Commonwealth franchise they would reduce the price of street lighting from $103 to $75 per lamp and reduce the maximum lighting rate to 14 cents primary and 9 cents secondary net for a period of two years and to 12 cents and 8 cents net for the following three years. The report by Messrs. Arnold and Carroll considered that these figures would be reasonable and fair. This proposition on the part of the Com- pany also contained conditions of minor importance. An ordinance embodying these provisions in regard to rates was passed June 11th, 1906, by the City Council and vetoed by Mayor Dunne on June 18th, the reason being that he did not con- sider the companies obliged to consolidate under the ordinance and that if they did not do so the 3 per cent, compensation which the City would receive on the gross earnings of the Commonwealth Company would not include the Edison Company, and also that he considered the proposed rates too high. The ordinance was not passed over veto. On July 1st, 1906, the Company reduced the rates to 14 cents primary and 9 cents secondary net, and abolished the minimum monthly bill of $1.00. On August 1st, 1907, another reduction was made to 14 cents primary and 8 cents secondary net. In Septem- ber, 1907, the Companies consolidated under the name of the Com- monwealth Edison Company without the sanction of the City Council. On March 23rd, 1908, an ordinance was passed by the City Council recognizing the consolidation of the com- panies under the Commonwealth Electric Company's franchise, which specifically terminated the ordinances of the previous- ly acquired competing companies and cancelled whatever right the Company might have had to operate commercial telephone service under the Commonwealth franchise. It also provided that 3 per cent, of the gross earnings be paid the City annually as compen- sation and specified a rate of $75 per annum for street arc lamps. The ordinance further provided for a maximum net rate for retail lighting of 14 cents primary and 8 cents secondary to August 1st, 1908 ; 12 cents primary and 7 cents secondary from August 1st, 1908 to August 1st, 1909; and 12 cents primary and 6 cents secondary from August 1st, 1909 to July 31st, 1912. This ordi- nance also provided that the Company permit the examination of its books and accounts not oftener than once each year by experts 0 * I 101 selected by the City of Chicago and approved by the Company for the purpose of regulating the maximum rates. While the Company was not compelled to make any changes in this latter rate for a period of three years, on May 1st, 1911, DIAGRAM NO. 20. — EFFECT OF PAST RATE REDUCTIONS ON CERTAIN INSTALLATIONS. 102 a voluntary reduction was made to 11 cents primary and 6 cents secondary; on April 1st, 1912, a reduction to 10 cents primary and 6 cents secondary; and on October 1st, 1912 the final voluntary reduction to 10 cents primary and 5 cents secondary net. During the existence of the Commonwealth Electric Company its maximum rates were identical with those of the Chicago Edison Company. Diagram No. 20 shows the effect of these rate changes on certain actual representative installations before referred to. It is of interest in this connection to note the effect of rate reduc- tion, together with improvements made in the incandescent lamp, on the amount of light, expressed in candle hours, which one dollar would purchase at various times since the beginning of the electric lighting industry in Chicago. This is illustrated by Diagram No. 21, which shows that the consumer receives about 91/2 times as much light for the same money now as he did fifteen years ago. Power : Previous to 1900 the maximum power rate was 10 cents per kilowatt hour. In 1900 the net rate was changed to 10 cents per kilowatt hour for the first hour’s daily use of the maxi- mum demand, 8 cents for the second hour, 6 cents for the third, 4 cents for the fourth and 3 cents for all current consumed above eight hours daily use of the maximum demand in any month, with a minimum bill of $1.00 per month per connected horse power. On February 1st, 1907 the present rate was established of 10 cents net per kilowatt hour for the first hour’s daily use of the maximum demand, 5 cents for the second and 3 cents for all over 2 hours daily use of the maximum demand in any month with a sliding- scale of discounts on the 5 cent and 3 cent portions, when same equal or exceed $50.00. The minimum bill was also reduced to 50 cents per month per connected horse power. RETAIL LIGHTING. From table No. 16 it is computed that the average retail light- ing installation, including metered tungstens and signs, imposes a maximum demand of .653 kilowatts upon the system, the average use of which is 2.6 hrs. per day, while the equivalent connected load is .97 kilowatts or about 191/2 16-cp. 50 watt lamps. The yearly maximum demand is somewhat in excess of the average of the monthly maximums, thus the former is increased to .683 kilowatts for the average installation under consideration. Of the total number of retail metered lighting customers, approximately 71 per cent, are residences, 27.5 per cent, commercial and 1.5 per cent, metered signs. In arriving at the investment required to furnish this service, recourse must be had to diversity factors on page 88 before the unit costs of any portion of the system can be applied to the case at hand. The factors used in the following computation were 3.5 as representing diversity from the average consumer to substation in the case of the alternating current distributing system and 3.2 for the direct current system. In calculating the unit costs of supply for various hours use of the maximum de- mand, allowance must be made for the variation of diversity 103 DIAGRAM NO. 21. — BENEFITS TO USERS OF ELECTRICITY RESULTING FROM INCREASED LAMP EFFICIENCY AND RATE REDUCTIONS. factors, since with 24 hours use, the factors would be reduced to unity in all cases. With an allowance of 7 per cent, return on the investment, cal- culations have been made showing the cost per kilowatt hour of furnishing alternating as well as direct current service to the aver- age retail metered lighting customer, for varying hours daily use of the maximum demand. This data, together with the revenue derived 14 13 12 II 10 9 8 7 6 5 4 3 2 I CENTS PER KILOWATT HOUR 104 5°/c I lOje I 1 5 ’A HOURS USE PER LOAD FACTOR DAV OF MAXIMUM 3|0% 3p *4-0'/. DEMAND 8 lO lGRAM NO. 22. — REVENUE AND COST OF SERVICE FOR AVERAGE RE- TAIL LIGHT AND POWER CUSTOMERS. rr 105 from this business, is shown in diagram No. 22. While it is not maintained that the results so obtained are more than approximate, on account of the meager data available, it is believed that they are of value as indicating as accurately as can be computed at the present time, the relations of cost and revenue. It will be observed that the direct current service is more costly than the alternating current service, on account of greater investment and operating costs due principally to conversion. For either class of service the present rate of ten cents per kilo- watt hour for the first hour’s daily use of the maximum demand, and five cents for the excess use, is greater than the cost, includ- ing an allowance of 7 per cent, on the investment, when the maxi- mum demand is used longer than about 1% hours per day. It is also evident that when the maximum is used less than about V/% hours per day as an average, the company fails to realize 7 per cent, on the required investment. Table No. 16 shows that about one- third of all retail lighting customers make use of their maximum not to exceed one hour per day, indicating that a large proportion are not profitable to the company when considered from their in- dividual standpoint ; yet if they did not employ the service, the cost of supply to those remaining would be increased. RETAIL POWER. Table No. 16 indicates that the average retail power installa- tion imposes upon the system a maximum demand of 2.08 kilo- watts, the average use of which is two hours per day. The aver- age retail installation is regarded as the average of all power users on the regular schedule (10 cents for the first hours daily use of the maximum demand, 5 cents for the second and 3 cents for all excess) , the secondary portions of whose bills do not ex- ceed $45.00 per month, and, consequently, are not entitled to quantity discount under the company’s present schedule. From the table of diversity factors given on page 88 calcu- lations have been made showing the cost of furnishing this ser- vice, which is shown in Diagram No. 22. It is seen from this diagram that the cost of power service is practically the same as for alternating current lighting, for the average hours daily use of the maximum demand, being below the lighting cost for greater use and above it for less use. Although the cost of direct current lighting service is higher than alternating current, as pre- viously discussed, the cost of both classes of power service is practically the same on account of the use of the same diversity factors for both alternating current and direct current power. The ordinary alternating current power supply requires relative- ly greater capacity in generating and distributing systems than direct current supply. It is of interest to note that the average hours use of the maxi- mum demand is greater in the case of retail lighting than retail power. 10G ESTIMATE OF PAST EARNINGS OF THE COMMONWEALTH-EDISON CO. While it was not possible to audit the Company’s books in de- tail from the date of the consolidation in 1907 to 1913, as was done for the year 1911, certain adjustments were made where the 1911 audit developed the necessity of correcting the Company’s figures to our standards for rate purposes. Overhead charges were revised on the same basis as for the year 1911, and depreciation similarly treated. The results are shown in Diagram No. 23, from which it is evident that the re- ductions in retail lighting rates, as well as general reductions in rates, have not impaired the return on investment. On the contrary, the surplus above a 7 per cent, return on investment has been largely increased. It is also seen that still further reduc- tions in rates effective in 1911 and 1912 would have been possible without reducing the net revenue below a reasonable and fair amount. It will be observed that a deficit is shown for the fiscal year ending September 30th, 1908. Reference to Diagram No. 11 indi- cates that the rate of return for 1908, as shown by the Company’s records, was lower than for any year since 1901. This is partly due to the increase in capital account caused by the appraisal, and part- ly to a less proportionate increase in revenue for that year. The Company’s records do not show a deficit for this period, because the amount charged off for depreciation was comparatively small. If the present retail lighting rates had been in effect in 1911, the revenue would have been decreased approximately $755,000.00, and only about $377,000.00 in 1912, as the present rates were effective October 1st, 1912. In addition to the above, further re- ductions amounting to $228,000.00 in 1911, and $636,000.00 in 1912, could have been made without impairing the 7 per cent return on the revised investment. These estimates make no allowance for the increased business which results from a reduction in rates. As previously discussed, equalization of the retail lighting and power rates is logical, and is advantageous to the consumer as his lighting bills are reduced. While the Company temporarily suffers a reduced revenue it benefits by a reduction in investment and operating expense; the percentage of decrease in cost being greater in the case of the small consumer who uses both light and power. Statistics show increased use of electricity with lower rates, so that a reduction in rates does not result in a correspond- ing reduction in income. For these reasons, and as a result of the elimination of certain unjustly discriminatory contracts dis- cussed on page 92, it can be stated that a reduction amounting to more than the above mentioned figure of $636,000.00 can be made on the basis of the 1912 business, for future years. If the light- ing rate had been 10, 5 and 3 cents during the year 1912, the revenue would have been decreased approximately $365,000.00 in addition to the $377,000.00 above mentioned. ' 107 DIAGRAM NO. 23. — ILLUSTRATING INCREASE IN RATE OF RETURN AND SURPLUS WITH DECREASING RATES. FUTURE RATE REDUCTIONS. Before attempting to estimate what may reasonably be ex- pected in the way of future rate reductions, it is necessary to be familiar with not only the present conditions, but also with the factors which have in the past contributed to reductions in the cost of electricity supply. One of the most important factors con- 'i n i$02 1903 1904 190s 1906 1907 1908 1909 1910 caL£.N DFtf* YE0RS tributing to reductions in both investment and operating costs is the replacement of steam engine driven generators by steam tur- bine units. This is well illustrated by comparing the Harrison DIAGRAM NO. 24 — ILLUSTRATING INCREASE IN ECONOMY OF FUEL CONSUMPTION. 109 Street Station, once considered a marvel in size and economy, with the latest turbine stations of the Company, in which the capacity of a single unit exceeds that of the Harrison Street Station at a cost per kilowatt capacity of less than one-fourth. The improve- ment in operating economy in these modern stations is partially illustrated by Diagram No. 24, which shows the reduction in fuel consumption effected by them. Even greater economies in labor, station supplies, etc., have resulted. Many economies in investment have also been possible in the transmission, conversion and distribution of current, partly by the development of the art, and partly by the use of larger units. As has been previously shown, the acquisition of large customers such as railways have made possible the use of these large generating stations, while the increase in the number of retail customers has resulted in a decrease in cost of the distribution system investment per customer. Diagram No. 3 shows the reduction in total plant cost per customer for a period of years beginning with 1898, notwithstand- ing the large investment for purposes of railway supply which tends to greatly increase this figure. It is well to point out here that much pioneer work along these lines has been done by the Commonwealth Edison Company, for which it deserves much credit. It was the first company to install steam turbine generators on a large scale and to take on large con- tracts at apparently very low prices as compared with past rates. The result has been successful and the public is now receiving the benefit of a lower rate than would be possible otherwise. Past reductions in rates have not resulted in an ultimate de- crease in revenue to the company, but on the contrary have re- sulted in increased receipts. It is evident though that there must be some ultimate point beyond which rate reductions will not re- sult in enough increased business to produce a fair return to the company on its investment. The predetermination of this point is difficult, if not impossible, but the indications in the case of the Commonwealth Edison Company are that the point has not yet been reached. Future reductions, based on the present state of the art can be expected for the following reasons, which, it is believed, will out- weigh eventually the upward tendency of labor and fuel costs; de- creasing investment cost per unit in generating, transmission, con- version and distribution apparatus and appliances; concentration of consumers, particularly in outlying districts, reducing the in- vestment per unit of distribution system; acquisition of large cus- tomers, particularly those whose maximum demands do not occur at the same time as the generating station peak loads; and the greater use of electricity by the public in general, particularly for purposes other than illumination. 110 APPENDIX. ELECTRICAL GENERATION AND DISTRIBUTION. Since the art of electrical generation and distribution is of comparatively recent development and its study is more technical in character than that of the operation of most other public utili- ties, it may be well to include a brief explanation of some of the more important features. Diagram No. 25 shows the modern power generating, trans- mission, transforming and distribution systems such as are em- ployed by the Commonwealth Edison Company. Electricity is generated by steam turbine driven alternating current generators at a pressure of 9,000 and 12,000 volts and transmitted through underground cables to sub-stations, where it is reduced in voltage for distribution. A voltage of 20,000 is em- ployed in transmission to some of the outlying sub-stations, being stepped up by transformers at generating stations. In the territory formerly covered by the old Chicago Edison Company, viz., south of North avenue, east of Ashland avenue and north of 39th street, the current is changed from alternating to direct current by rotary converter sub-stations, as well as being reduced to 110 and 220 volts, at which pressure it is supplied to the consumer. Direct current distribution is employed in this district, as it is well adapted to congested territory and its use enables the employment of storage battery auxiliaries to carry the load in case of trouble on the generating, transmission or converting systems. Outside of the above mentioned district, the alternating cur- rent system of distribution is employed, where the current is trans- formed from the transmission voltage to 4,000 and 2,300 for pri- mary distribution, which is partially underground and partially overhead. Transformers which reduce the primary distribution pressure to 110 and 220 volts for secondary distribution to cus- tomers are located on poles central to the territory which they supply. Alternating current is employed in the outlying territory, as it is the most economical system where the load is distributed ever a large district. UNITS. The term “kilowatt” (meaning 1,000 watts) is used to desig- nate the rate at which electricity is used, while “kilowatt hour” is the unit applied to the total amount of electricity used in a period of time. The term “kilowatt hour” may be considered as corre- sponding to “cubic feet” in the case of gas. Expressed in more familiar terms the kilowatt is approxi- mately one and one-third (1 1-3) horse power. The amount of electricity used by customers is measured in kilowatt hours by a watt meter, the dial of which is read in the same manner as a gas meter. As has been explained in the body of the report, correct methods of charging for electricity should take into consideration the maximum rate at which the current is used, or, in other words, the maximum kilowatts, as well as the Ill total kilowatt hours used for the same period of time. The maximum rate of use is ordinarily measured by an in- strument known as the Wright maximum demand indicator. This instrument is so constructed that it does not operate instantane- ously, but requires about one-half hour for full registration of the maximum load which is in service at one time, so that a few mo- ments use of a greater current will not cause it to register a higher maximum than previously used during the period. The maximum demand indicator is re-set at every reading of the watt meter, so that the customer's maximum demand is ob- tained for each meter reading period. At present, for installations of less than one kilowatt capacity (or the equivalent of twenty 16- candle power carbon filament lamps), the maximum demand indi- cator is no longer installed on account of the comparatively large investment required. In these cases the maximum demand is cal- culated from the average of a large number of previous installa- tions where the indicator was employed. A table of these averages follows : MAXIMUM DEMAND TABLE FOR INSTALLATIONS UNDER ONE KILOWATT CONNECTED LOAD. CONNECTED LOAD. RESIDENCE LIGHTING. (Monthly Basis.) COMMERCIAL LIGHTING. (Monthly Basis.) K. W. H. at Full Rate. Estimated Maximum Number of Sockets Used Simultaneously. K. W. H. at Full Rate. Estimated Maximum Number of Sockets Used Simultaneously. Number of Sockets. Wattage. Equivalent 1 50 9 1 o 1 9 100 3 9 3 2 3 150 5 3 5 3 4 200 6 4 6 5 250 5 8 5 6 300 8 5 9 6 i 350 9 6 10 6.7 8 400 10 6.7 11 7.3 9 450 10 6.7 12 8 10 500 11 7.3 13 8.7 11 550 11 7.3 14 9.3 12 600 12 8 15 10 13 650 12 8 16 10.7 14 700 13 8.7 17 11.3 15 750 13 8.7 18 12 16 800 14 9.3 19 12.7 17 850 14 9.3 20 13.3 18 900 15 10 21 14 19 950 15 10 22 14.7 In alternating current motor installations the Wright Maxi- mum Demand Indicator is not applicable, so that the maximum demand is determined, except in special cases, by the following percentages of the rated capacity of the connected load : Where installations are under 10 H. P. and only one motor is used 85% Where installations are under 10 H. P. and more Ill- A GENERATION — TRANSMISSION DISTRIBUTION ><— SERVICE OFFICE BUILDING D 0 STACKS BOILER I IrOON TURBINE ROOM SWITCH HOUSE DIRECT CURRENT SUB -STATION ROTARY CONVERTER 100^ Note- the figures indicate approximately the PERCENTAGE OF ENERGY IN THE COAL UTILIZED BY VARIOUS PARTS OF THE SYSTEM. FIGURES APPLYING TO CUSTOMER'S PREMISES SHOW THE PERCENTAGE OF ENERGY IN COR L BURNED TO FURNISH HIS SERVICE DELIVERED TO HIM AND DO NOT REPRESENT THE COMPARATIVE OUTPUT OF THE TWO DISTRIBUTION SYSTEMS OF THE COMMONWEALTH EDISON CO. REPORT ON CLCCTRiC 9ATE y 190 TRftNSMISSON CABLE. 10 . 57 * -SWITCH BOARD D D -&■ □ D 0 D o a 0 D D □ UNDERGROUND CABLE JUNCTION BOX 9 . 17 * sf- SERVICE ALTER NOTING CURRENT SU8-STRTION POLE LINE RESIDENCE TRANSMISSION CABLE \ 0 . 4 % liit;.. STEP-DOWN TRF.TSFORMER PRESSURE REGULATOR 10 fo UNDERGROUND CABLE 87 - diagram NO. 25 — ELEMENTS OF A LARGE ELECTRIC SYSTEM AND LOSSES OF ENERGY IN VARIOUS PARTS. 112 than one motor is used 75% Where installations are from 10 H. P. to 49 H. P., both inclusive (irrespective of num- ber of motors).. 65% Where installations are 50 H. P. or over (irre- spective of number of motors) 55% TESTING OF ELECTRIC METERS. Under an ordinance passed December 13, 1909, in effect from January 1, 1910, the City Electrician, upon request or tne con- sumer, is required to test electric meters through which electricity at a pressure of 600 volts or less is purchased. This ordinance has not heretofore been enforced, but an appropriation has been made for this work and the Department of Electricity will be in position to furnish this service as soon as the funds are available. METHOD OF COMPUTING ELECTRIC BILLS UNDER THE WRIGHT DEMAND SYSTEM USING COMMONWEALTH EDISON NET RATES AS OF APRIL 1, 1913. Primary Rate. 10 cents net per kilowatt hour for all electricity supplied in each month, up to and including the supply equal to 30 hours’ use of the consumers’ maximum demand in such month. Secondary Rate. 5 cents net per kilowatt hour for all electricity supplied in any month in excess of that supplied at the primary rate. Comparison of Long and Short Hours Use of One Lamp. One lamp uses 50 watts. The use required of each lamp or its equivalent before the secondary rate becomes effective is 30 (hours) X 50 (watts) — 1500 watt hours, or iy 2 kilowatt hours. Long Hours Daily Use of One Lamp. Assume one 16 candle power lamp burning 20 hours per day. Current used equals 50 (Watts) X 20 (Hours) X 30 (Days) == 30,000 watt hours or 30 kilowatt hours per month. The maximum demand is 50 watts, and 30 hours use per month or one hour’s use per day of the maximum demand is 1V 2 kilowatt hours. The bill is as follows : ll / 2 kilowatt hours at 10 cents $ .150 (30 — IV 2 ) 28 V 2 kilowatt hours at 5 cents. 1.425 Total net bill $1,575 Average rate per kilowatt hour, 5% cents. Short Hours Daily Use of Twenty Lamps. Current used equals 20 X 50 (Watts) X l(Hour) X 30 (I 1 ( l ) f 113 (Days) = 30,000 watt hours, or 30 kilowatt hours per month. As the twenty lamps all burn at the same time the maxi- mum demand equals 20 X 50 = 1,000 watts or 1 kilowatt, and 30 hours’ use per month or 1 hour’s use per day of the maxi- mum demand is 30 kilowatt hours. The bill is as follows : 30 kilowatt hours at 10 cents $3.00 0 kilowatt hours at 5 cents 00 Total net bill $3.00 Average rate per kilowatt hour, 10 cents. When the use of twenty lights for one hour per day is compared with the use of one light for twenty hours per day, it is evident that the average rate in the first case is 10 cents per kilowatt hour and in the second, 5 % cents. This difference is considered just and equitable, because in the first case, ap- proximately twenty times the investment in apparatus is re- quired as in the other, in order to give the service demanded. While in each case the amount of electricity used is the same, the customer whose service requires a smaller investment should be given the benefit of a lower rate. / 4