CENTRAL STATES WATER WORKS ASSOCIATION
The Thursday morning (second) session of the nineteenth annual convention of the Central State Water Works Association, held at Columbus, O., October 20 and 21, was opened by the Secretary, R. P. Bricker, who, as Mr. Martin had not yet arrived, nominated Mr. Wiles as chairman. This motion was carried and Chairman Wiles introduced Burton McCullom who read a paper on “The Advisability and Safety of Grounding Lighting Secondaries Upon Water Lines,” by Mr. McCullom and O. S. Peters. After the discussion on this paper the chairman thanked Mr. McCullom and announced that the paper would be spread upon the records of the association. He then introduced John W. Hill, C. E., of Cincinnati, O., who read a paper on “Sources of Water Pollution.” After the reading of this paper the chairman said: “We have with us to-day a gentleman whom I should like to call before you, who is closely connected with the Public Utilities Commission of the State of Ohio. His duties bring him in close contact with the water men and the gas men of the State. In fact, that is his department. I would be very glad to have Mr. Critchfield give us a few remarks.”
Address by C. V. Critchfield.
Mr. Critchfield said in part: “In 1867 the Ohio Legislature created the office of Railroad Commission, and I dare say that this official was probably the forerunner of prototype of the present Public Utilities Commission. In 1906 there were two more members added _ making a Board of three Railroad Commissioners. This Board had only to do with steam railroads in Ohio. In 1911 this commission was changed to the Public Service Commission of Ohio, and its authority was increased to take in not onlv steam railroads, but other utilities, and in 1913, the name of the commission was changed to the Public Utilities Commission. There was not very much change in the law from 1911 by the law of 1913, except that it corrected some matters relating to the appeal of cases from the Commission to the Courts. The decisions of the Commission are not final; all decisions and orders of the Commission, may be appealed to the courts, but if there is any one thing that might be said for the Utilities Commission, not only in Ohio, but elsewhere, it would be that it is a body that expedites matters, and you can get much quicker action through the Utilities Commission than you can through the slow processes of the courts. The powers of the Commissionand when I make these remarks I assume that there are a great many members of this Association present who do not live in Ohio, and I may make some statements that are very familiar to the members who live in this state. The powers and scope of the Public Utilities Commission has to do first with the issuing of securities, with the issuing of stocks and bonds, and even notes, where they run more than a year. It also has to do with service. By service, I mean matters affecting the kind of service that you are rendering at your individual plants. If some of your consumers should make a complaint as to the service to the Commission, it is its duty to investigate such complaints. It also has to do with rates. As a rule rates are established by the local authorities in each municipality. The council fixes a maximum rate. If that is accepted by the company, and becomes a contract, the Public Utilities Commission has no power to change it, although it may change certain classifications. In other words it cannot change the maximum rate, but if you, under a maximum rate, establish different classes and different prices for water to those different classes, I think that the Commission probably has the right to investigate those classifications and those underlying rates. The Commission in making a rate is obliged by the law to first make a valuation of your property. Until the last Legislature the law was so construed that any municipality might call on the Commission to value its property without assigning any reason, but I think there has been an amendment at the last Legislature by which before the Commission will undertake to value your property, there shall be a preliminary hearing and at that hearing the Commission shall determine whether there is an actual necessity for making the valuation. About a year or more ago there was an order issued by the Commission which the Ohio members are familiar with, known as the 176 order. Order 176 required that all water works in Ohio, along with other utilities, should file with the Commission a complete inventory and valuation of their property. The first item called for was a valuation of all lands. At the time the order was made, we had as a member of our Commission, a gentleman who had definite ideas as to what constituted land. This member wanted it distinctly understood that land was land, and without anything added to it in the way of buildings,.—it was simply land without anything added to it by man, so that if any of you have not filed that appraisal, you must distinctly keep in mind that when land is referred to, it means land only. In making the valuation the Commission called in this order for a reproductive value as of a certain date. In determining values, you must remember that it is the value of the property at the date when the appraisal is made. It means, what did it cost to buy the material, what was the cost to put that material in position, and you must forget entirely your books, and what your books may show’ as to the original cost of the particular item that you are inventorying. That is true with the exception of the one item of land, and there the order states that the Commission would like to have from your records, if your books so disclose, the original purchase price of the land, but it stops with that and does not want any information as to what a boiler, an engine, pump or anything else cost as shown by your books, but what it would cost on the day of appraisal. From that, the company is expected to depreciate its property down to its present value, and when you get into the matter of depreciation vou get into a very intricate subject. It is a subject on which a great many men differ, and it is left for the manger or the man who is making up the appraisal to use his own judgment as to what that depreciation is, and how he arrives at it. There are two or three well known methods of depreciation. One is the straight line method; another is a sinking fund method; and the other is a depreciation determined by actual investigation or observation. While 1 am not speaking as a representative of the Commission, and what I may offer is my own observations, I think that the Commission rather favors the plan of depreciation of property as made from observation. That is not always possible, and you may have a composite depreciation coming from age, along with the observation. This is the case in mains. You cannot observe them, except as you, from time to time, go down for repairs, or tapping for services, so that in this item it is almost necessary to figure on the age in order to give you some clue as to the possible present value of the mains. All companies are vitally interested in appraisals, because whenever you come up to the point where you want to issue bonds or stock, you are confronted then with the question of the value of your property. Coming to depreciation, I would consider the one element which measures it more than anything else, to be the matter of maintenance. If you want to know how much a thing depreciates from year to year and you have a very accurate record of what it has cost you to maintain the property, then you have a pretty fair idea of what should be the basis of depreciation. As an illustration, on the question of meters, how much do meters depreciate from year to year? I do not know whether among the members of this Association there has been any one who has kept an accurate record of what his company puts into their meters. I dare say you have a meter repair account, and you can say you have spent fifty, or a thousand, or fifteen hundred dollars in repairs for meters, but you cannot single out a certain meter and say that that meter has been added to by repairs in maintenance so much, and that is where the record fails of its most important purpose. In preparing a valuation for instance on the question of rates, my observations in the various cases that have come before the Commission during the time I have been associated with the Commission, something like four years, leads me to believe that a great many companies handicap themselves in coming before the Commission unprepared. Their petition or application is presented in a loose, unbusinesslike way, and while they may be absolutely honest in their statements that they make, there is an impression created from the fact that they are not prepared to answer this, that and the other question, that there is something suspicious about it, and that is another reason why I think that your records should be very complete when you come to the time when you want to file an application asking for a stock or bond issue, that your petition may be clean cut and to show an answer to every question that is required to be answered by the law in matters of application for the issuing of securities and fixing of rates. The preparation of a valuation means the value of your property as it exists, and that property which is useful in serving your consumers. Our Commission, from my observations, have come to the conclusion that no allowance should be made for paving over mains, that is, I mean, paving that was placed over the mains after the mains were laid, although there is some reason why there should be some value attached in cases where the mains are laid after the paving. Another matter is the question of franchises. It is hardly worth while to speak of that, but in passing it might be stated that there is no allowance made for a franchise. The Commission does not consider that a franchise has any value although it is very proper to introduce the cost of obtaining the franchise, that is, the legitimate cost of obtaining a franchise. There is also an item which I have introduced into all my valuations, and that is working capital. Working capital has been variously defined. Some call working capital the amount of money you have invested in supplies, and extra parts. In the case of a water company, it would be the pipe you had on hand, meter repair parts, extra parts for pumps and things of that sort. That is a very proper thing to have in an appraisal. It is money that you are required to have invested in those things. It is a prudent thing to do. The State of Ohio expects you to be prudent men and prepare for things of that sort, that will prevent an interruption of the service. But beyond that I think there is a certain amount of money that you should introduce into your valuations that is not represented by these supplies that I have just spoken of, that is, some money that you can lay your hands on, money in the bank. I do not mean the money coming from the routine of the business, such as the collection of the water bill in March for water supplied in February, because that is a continuous operation, but I mean money beyond that, so if at some time you find the market is such that you can buy large quantities of cast iron pipe on favorable terms, that you will have a fund to draw on, and be able to buy severay carloads to meet the demand of some future time. There is still before the Commission the question of a going concern value. There have been various Court decisions on the matter of going concern. One of the most prominent cases was that of the Consolidated Gas Company of New York. In that case the Court held that there wasn’t such a thing as a good will value for rate making purposes. There might be good will value if you wanted to purchase your neighbor’s plant, but so far as the value of the public is concerned there wasn’t such a thing as good will, from the fact that it was a monopoly. Good will was figured as being something arising from the fact that the consumer had the opportunity of choice, but where there was only one water company, or only one gas company, or only one electric light company, that the consumer must go to that particular company, in other words there was no competition. It was not the good will that the grocer has by which the old customer is likely to resort to the old place of business. But there is a going concern value which means the cost of getting business. There is quite a difference between a plant that has no consumers, and the plant that has consumers, and I think the Commission, from my observations, is inclined to give some value to the cost of attaching customers to your plant, and that, I think, is a very proper item to introduce and present to the Commission when you come up to the matter of valuation of your plant and your business. As stated before, Commission’s rulings are subject to review by higher courts. In not many instances have cases been appealed, but there have been a few cases in which appeals have been taken from the orders of the Commission.
The discussion that followed was in part as follows:
Phil Burgess: “Has there been any effort to bring the municipally owned utilities under the control of the Commission, as well as the privately owned plants? I think that is a point of more importance to the man who is operating a private plant, because he has to make his plant self-supporting.”
In answer to Mr. Burgess’ inquiry, Mr. Critchfield said about the only thing that has been done in that direction, is in the matter of accounting. The Public Utility Act provides that the Public Utilities Commission may prepare a system of accounts which the municipally owned plant must keep. It is felt that this is the entering wedge by which the Commission might get into the matter of governing and controlling the municipally owned plant. About a year ago, the Commission started to prepare a system of bookkeeping for all kinds of utilities. Pursuant to that they employed a gentlemen preparing a system of bookkeeping for electric light companies. The Commission was reorganized and the matter has been dropped. That question came up the other day as to whether the Commission has prescribed any form of books for other utilities than electric light companies and I am in a position to say that they have not.
John W. Hill said: “I am very much interested in your remarks. You have furnished me with information of which I shall avail myself later, and yet there are some things I would like to speak of. One is depreciation. All that you have said about it is correct, perhaps, but there is many a case where a particular bit of a water works or a gas works or some other utility, after being used for fifteen or twenty years, is quite as good as it was the day it was purchased and put in service. Now comes the other proposition. There may be boilers and pumps and other machinery that have outlived their usefullness by the advance or progress along that particular line. The question of depreciation: The straight line method I do not believe is proper, and the sinking fund method I have not used. I use a method by fixing a value by the real worth of the particular bit of the public utility today, and think perhaps it is the best. In regard to the value of a franchise, I know that, under the law of this State, the franchise has no value, but a few illustrations have come under my observation, where a franchise or good will, or going concern, has had a very great value.”
Jerry O’Shaughnessy remarked that he could not understand why the Utilities Commission docs not add any value to the pipe under an improved street and said: “It is placed under an unimproved street, and afterwards the street becomes improved, and it surely has changed the value of it. I do not understand how they reason that way, if you go and buy a vacant piece of property anywhere and somebody comes and improves it around you, it adds value to it, and if you had to place that main in the street after it was improved, it would cost more to do it. I would like to have Mr. Critchfield explain how they reason that out. I have taken up mains that have been in the ground for thirty years, and found them just as good as when the pipe was first put down. There are a great many reasons why that would not be true all over the system, as I imagine that mains in certain formations would be attacked from causes that do not exist in other parts of the city, and in other formations they would not be attacked.
Mr. Critchfield: I do not believe that the Commission has made any formal declaration. Their findings would seem to say that you did not lay the paving and that they were put down without expense to you, other than your portion of the taxes, as a taxpayer of the city. But you can put the cost of cutting through into your maintenance. You can show in certain years that by reason of the fact that there was a pavement there, that it took more to go down to repair your mains than it would if there had been no pavement there. While it is a proper charge to your maintenance account it should not be added to the value of the plant.
Mr. O’Shaughncssy then asked: Supposing now in the City of Columbus that you had a bonded indebtedness of three million and a half on the water plant. Now, to make an appraisment and value the plant as an asset; how would you arrive at the value of the main that we put on High Street; would you put on the value that it cost us, or what it is worth to-day?
Mr. Critchfield replied: The Commission makes two sorts of appraisals, or rather it makes an appraisal for two different reasons. The Commission can appraise the property where there is a question of rates involved, and it can also appraise a property where there is a question of purchase and sale. If a certain municipality comes to the conclusion that they would like to buy the local water plant, they can call upon the Commission to make a valuation of that water plant, although it is not binding on the city to accept that appraisement. Now, it occurs to me in any question of purchase and sale that the Commission probably might introduce and allow the matter of paving, but on the question of rates—and answering your question direct Mr. O’Shaughncssy, they will attempt to fix the value of your mains as they exist to-day; they would ascertain what it could cost if your mains did not exist, to put them there, and then they would depreciate them down to the amount that they had suffered from actual wear and tear and any other elements.
Mr. Martin said: On the question of paving, I think that the Commission have really no authority’ to take up that matter as our courts have decided. One decision was by the Supreme Court of the United States, that paving is not a proper charge, where the paving is made after the main is laid. Now, the theory and the argument advanced there was this, that the consumer should only pay a rate of return on the actual investment. Now, one question in reference to the depreciation of you property. These returns that we are making in the way of appraisals, no doubt, you have found, are used not only by the Utility Commission for rate purposes and valuations, but if any of you have been before the Tax Commission you will find that they have the same valuation, and at once they begin to question you as to why you should not be taxed according to your return. If the Commission would allow’ you a rate of return upon your valuation, and that could be changed from year to year, so that your return would always be adequate and fair, then vou could make one return that could be used for both taxation and rate making purposes, but all of our contracts are made for periods of five or ten years water service, and cannot be altered or changed during that period, while the tax return is changed each and every year.
Mr. Burgess remarked that in the matter of making appraisals Mr. Critchfield had mentioned a number of methods and said: “And some, I think, he has not mentioned. I recently was interested in a case where a valuation of a private property was made by an engineer and he used a method of reproduction new. He argued, however, that in order to reproduce this property at that particular cost they would have to obtain the money, and in order to obtain the money they had to sell bonds at a distcount, that is, bonds assumed to be at the rate of five per cent, to be sold at ninety cents on the dollar. Now, I would like to ask whether or not the Commission, in making the valuation, on the method of reproduction new, has given any consideration to this discount, whether or not they would add to the valuation obtained, or reproduction cost, the item representing the bond discount.”
Mr. Burgess added: “It is not exactly broker’s discount. For instance, in order to raise $100,000, you would have to sell $110,000 of bonds. In other words, there is a ten per cent, discount on the bonds, and it is argued frequently that that ten per cent, is cost, it is reproduction cost, and should be included, and would fairly add ten thousand dollars to the reproductive cost of the plant, representing the cost of obtaining the money to build the plant,”
Mr. Critchfield, replying, said: “I do not think the Commission has directly answered that question, except in this way. If it is the intention of the utility to make an extension and to purchase $100,000 worth of material, and it is shown by the sale of bonds that they can only raise $00,000, that they could sell more bonds; or in other words, that they could sell $110,000 of bonds in order to secure $100,000 to purchase a $100,000 of material. The Commission will permit them to do that, because in every issue of bonds they make that inquiry specifically as to what the securities will sell at, and very often testimony is introduced as to the market value of the bonds and stocks, and as to what they can reasonably expect to get from the sale of them. Hence, I take it the Commission is in this situation, the Commission is concerned in the value of securities, although they do not profess to do that, but the fact is they do try to put some stamp of approval on the bond or stock issue. But on the other hand they are more concerned in having the company give good service to the public, no matter what the cost. And answering your question directly, I think they would have permitted the issue of securities in such an amount as would realize the amount of money that is necessary in order to make the improvements or extension.
Mr. Burgess: I appreciate that they do allow that excess of the issue. The whole thing comes down to this, to my mind, that in making a reproductive value of a hundred thousand dollar plant, you are going to sell bonds for $110,000, and there is a loss there of $10,000 temporarily. In placing the reproductive cost new on that property, before you depreciate it, there is a problem of where to put that $10,000—you add that $10,000 to the reproductive cost new, as of to-day.
Mr. Critchfield replied: That is, if in times gone by, in year to year financing, that you have sold bonds at less than par, the Commission will in valuing the property take that into account?
Mr. Critchfield, in conclusion, said that the value of a property is made on its physical assets without reference to its issue of capital stock or bonds. In other words, if you in the past have only been able to sell your securities or bonds for seventy-five per cent, of their face value, why that is your misfortune, and all that you are entitled to is what it would cost now to build your plant, but as to future matters where you go before the Commission and say it is necessary to buy new boilers and engines, and in order to do that, that you will have to sell bonds, at ninety, I think the Commission will allow you to sell an additional amount of securities to raise the amount of money necessary and further said, in response to a point raised by Mr. Martin, that the Commission has allowed overhead percentage, adding: But T don’t think it contemplates that in that percentage there is absorbed the amount the company loses by the sale of securities. There are certain things that are recognized in the construction of a plant; where there is money being invested constantly, and no return, the C ommission allows a fair rate of interest on that. They allow for taxes you may pay before your business becomes self-supporting; they allow for insurance, accident insurance and fire insurance; they allow for all engineering and certain fees that you pay to the Secretary of State for your franchise and other things of that sort, but if it also includes losses that you receive by selling your securities at less than their par value, it is news to me, although that may be the case.
Second Day—Afternoon Session.
The convention met with Captain C. W. Wiles in the Chair. R. P. Bricker, Shelby, O., read his report as secretary. Treasurer A. W. Inman then presented his report and these reports were referred to the auditing committee. The Committee on By-Laws presented its report and the “By-Laws of the Central States Section of the American Water Works Association” were adopted.
Election of Officers.
Chairman Wiles announced the next item of business to be the election of officers for the ensuing year, which consists of a Chairman, Vice-Chairman, Treasurer, and three Directors. The Nominating Committee, composed of S. F. Messer, W. F. Schickler and E. Tobias, reported as follows: Chairman, Jerry O’Shaugncssy, Columbus, O.; Vice-Chairman,
F.lroy Tobias, Hastings, Mich.; Treas., A. W. Inman, Massillon, O.; Directors, C. W. Wiles, Delaware, O., 3 years; Chas. Londick, Three Rivers, Mich., 2 years; H. H. Frost, Akron, O., 1 year. Secretary to be appointed by the Executive Committee. On motion the Secretary was instructed to cast the ballot for the above named nominees. On motion R. P. Bricker was appointed to act as temporary Secretary until such time as the Executive Committee could get together and appoint his successor. On motion of Mr. Beardsley, the applications of Mr. Wetter, of Tiffin, and Mr. Jones, of Circleville, were presented for membership in the Section, and the same were voted in. After some discussion, the time and place of meeting for next year was left to the decision of the Executive Committee. Upon motion of Mr. Burgess, it was decided that the Chairman of the Division appoint a Legislative Committee to take up with the proper parties the subject as to whether or not the cities could pay the expense of a representative to the American Association meeting The meeting then adjourned.