PUBLISHED BI-MONTHLY BY The League of Minnesota Municipalities Entered as second-class matter April 28, 1916, at the Post Office at For there is an air about a city, and it has a way with it, whereby a man may recognize one from another at once. There are cities full of happiness and cities full of pleasure, and cities full of gloom. There are cities with their faces to heaven, and some with their faces to earth; some have a way of looking at the past and others look at the future; some notice you if you come among them, others glance at you, others let you go by. Some love the cities that are their neighbors, others are dear to the plains and to the heath; some cities are bare to the wind, others have purple cloaks and others brown cloaks and some are clad in white. Some tell the old tale of their infancy, with others it is secret: some cities sing and some mutter, some are angry. And some have broken hearts, and each city has her way of greeting Time. -LORD DUNSANY, In "The Madness of Andelsprutz.". Will Your Municipality Be Represented? The League has more members than ever, and it is fair to expect that the attendance at this year's convention will set a new record. An examination of the registration book reveals that quite a few members omitted to send delegates in previous years, even though the attendance was large. Now a municipality can get a great deal of benefit from its membership without being represented at the convention, but that's no reason to forego the greatest benefit the League offers its members. From some members the whole council and administration have come; others have sent fewer. This year every member should have its delegate at Rochester. Their expenses are a very proper charge for the municipality to pay, inasmuch as the municipality is to receive the benefit of their attendance. Most of the municipalities have recognized this. The other members should do so, since they cannot get the full measure of good from their League without representation at its convention. THE BASIS OF RATE MAKING In some of the states of the Union there are public utility commissions with a measure of statewide authority. And some of these commissions, upon being approached by public utility corporations with "emergency" petitions for rate increases, have assumed and exercised the authority to grant such increases notwithstanding that the corporations were already charging the maximum limit under their franchise contracts, and notwithstanding the protests of the municipalities affected. It is true that the full increase requested has seldom if ever been granted, for the cities have been able to show that the claimed losses were larger than the real. It is a happy circumstance that Minnesota has no public utilities commission with such authority; and that the courts have held that franchises are contracts as capable of enforcement as are any contracts. And there is an element of grim humor in the present aspect of certain utility corporations which in their prosperous years met requests for rate concessions by pointing to the franchise and saying: "That's our bargain, and it's not our fault if it's a hard one for the public." Now these same corporations are asking to exceed the franchise rate, and the cities have learned the answer well. costs. But there is no denying the fact that utilities are now bearing heavier When they come to the city council petitioning for an increase of rates they do so upon the ground that they are losing money under the old rates. And every council recognizes that if this claim is substantiated the rate increase should be granted; not only is it the fair thing to do, but it is the only way of assuring the maintenance of good service, as well. When we find this situation we find the minds of the council and of the utility men have in effect met in agreement upon this, that a service-at-cost basis is the proper basis for making rates, whether it is so written in the franchise or not. But this fundamental agreement is only the beginning of the process of determining whether the present rate is or is not adequate. Inasmuch as the utility corporation is claiming the loss and seeking relief, upon it devolves the burden of proof. What figures, then, must the council require it to show, before granting the increase? For it is necessary that the council prescribe them, if confusion is to be avoided. The editor had occasion recently to examine some figures submitted to the council of a small city, which were altogether worthless, consisting merely of a disbursement record, distributed among a number of accounts which have little or no significance for rate making purposes. Furthermore, the $6800 loss purported to be shown on six months' operation scaled down to less than $4000 by the correction of but a few obvious errors. At the same time the corporation furnished an unsubstantiated statement from their ledger claiming a loss of $6500 for the six months. This loss may have been actual or not, but at any rate it is the one the claim of which should have been supported by figures from the corporation's books. It is worth while to set forth a schedule of the items which must be known by the council which is to determine upon the fairness of a given rate and upon the justice of a petition for an increase. The Capital Cost I. The first thing necessary to be known is the capital cost of the utility, that is, the annual or monthly amounts proper to be paid from earnings to stockholders as dividends, to bondholders and to other security holders as interest. This capital cost can be determined by finding the proper valuation of the utility or such portion of it as is used solely in or allocated to the particular municipality for the purpose of supplying electricity, water, gas, or heat, as the case may be, and applying to that valuation the rate which may be deemed proper and just for the utility to earn. a. There are several possible methods of determining the proper value, the principal among them being that of appraisal at market value, so called, of determining the cost of reproduction new, less depreciation to present condition, and what may be called the historical method. The first of these is quite an elusive and unsatisfactory method; the second is seldom satisfactory, and by reason of the abnormal war prices now obtaining, would result in a valuation far too high for a plant built several years ago; the historical method, being easy to correct in any item in which it might work a manifest. injustice, must receive the preference for small cities and their utilities. It should be no dificult matter for the corporation to show what capital was actually invested in its plant in the first place, together with subsequent additions. Nothing should be allowed for franchise or going value, so called. Property or equipment not required for the efficient operation of the utility business should not be allowed, however good or bad an investment it may be intrinsically. Sometimes capital equipment is used jointly to supply other municipalities, as a common power house, or to operate other utilities, as where the same boilers furnish steam both for generating electricity and for pumping water, or where either exhaust or live steam, or both, is used in a central station heating system. In such cases it is necessary to allocate or apportion the investment among the several municipalities or utilities enjoying the joint use. This may appear a formidable task, but is not impossible if undertaken by means of a formula such as described in the bulletin printed on other pages of this issue. If the corporation has regularly set aside sufficient sums to care for depreciation, and has either accumulated them into a reserve fund or spent them in improvements or extensions which keep the value of the utility up to the original investment, the valuation for rate making will be the same as with the original investments; if neither of these has been done, it is to be assumed that the sums which should have been devoted to those uses have been paid to stockholders in excess dividends, and, consequently the valuation should be reduced by the amount of accrued depreciation. Investments of new capital from undivided earnings should not be allowed. Capital invested in any retail business carried on in connection with the utility should be excluded. b. We must decide upon an earning rate to be applied to the valuation reached. That portion represented by bonds or other securities is of course entitled to earn the stipulated rate, and perhaps more, up to the rate agreed upon for dividends. This rate may properly be higher than that which Liberty Bonds pay. But it should not be so high as current loan interest, or as would be expected from a successful investment in a competitive business; for the utility is in fact a monopoly, and under service-at-cost principles its earnings are guaranteed by the provision that rates can be increased to maintain earnings. If a sliding scale is at all acceptable to the corporation the city should gladly incorporate it into the agreement. Operating Costs II. The second group of expenses upon which the rate depends is that incurred in the operation of the utility. There are, of course, a multitude of these, but they can easily be grouped under a few heads. For instance, electric corporations in California report all operating expenses classified as follows: production, transmission, distribution, commercial, general and miscellaneous, (i. e. overhead), by-product and steam sales, expenses, taxes, and amortization of general capital; depreciation is included under the last heading. Another simple classification, which could be used in many cases, would be as follows: repairs and maintenance, fuel, miscellaneous supplies, labor, except as charged in other expenses, overhead or general expenses, insurance, taxes, depreciation. a. The statement of these items should cover the actual cost by months for at least two years past, and should include careful estimates, based upon existing contracts or supplies on hand as well as on current prices, of the same items for a year ahead. b. Mere disbursement records should not be accepted, as expenses may be accrued for several months and paid all at once, or supplies purchased in one month may last six. For instance, in the fuel account we want to know how much was burned in March and how much in July, not how much was paid for then, and similarly with other accounts. What we need is a cost record, not check stubs. C. All expenses chargeable jointly to more than one city, or to more than one utility or business, should be allocated as to each city and utility. d. The expenses shown should be only such as are necessary for the efficient operation and management of the utility. The consumers should not be asked to pay for coal to heat water which runs through a leaky boiler without doing any work, or to bear any other expense which is a waste. |