Four-State Section A. W. W. A. Meeting
First Meeting Since Beginning of War—President Davis on Philadelphia’s Water Situation—J.W. Ledoux on Pennsylvania Public Service Commission—Good Attendance
(Special Report to FIRE AND WATER ENGINEERING)
A LUNCHEON on April 16th, at the Bellevue-Stratford Hotel, Philadelphia, constituted the first gathering of The Four-State Section of the American Water Works Association since pre-war days. Despite the uncertainties of railroad travel, a surprisingly large number of members attended from all points in the four states forming the jurisdiction of the section, Eastern Pennsylvania, Southern New Jersey, Delaware and Maryland.
Carleton E. Davis on Philadelphia’s Water Situation
The national president, Carleton E. Davis, in the absence of Mayor J. Hampton Moore of Philadelphia, welcomed the members and after briefly outlining Philadelphia’s water supply situation, analyzed the form of organization of the association, pointing out that the present sectional divisions and consequent lack of cohesion as a national body, operated during the war and will continue in the future to operate so as to diminish the force and effectiveness of the influence of the association in public affairs.
Waldo Smith Parallels New York and Philadelphia
J. Waldo Smith of New York took occasion to parallel the water situation of New York City with that of Philadelphia, deprecating the fact that in cases of large water works projects requiring a number of years for their construction, citizens are prone to consider their water supply problems settled for all time, whereas the contrary is true, the fact being that during the period of construction the continued growth of the community may oftimes render the new project inadequate at the time of its completion. To illustrate, he showed that during the fifteen years of construction of the Catskill extension to New York City’s water supply, the daily rate of consumption had been increasing approximately one hundred millions of gallons every five or six years. So that by the time the first extension was completed, the day when it would become inadequate to the city’s needs, was already in sight.
J. W. Ledoux’s Paper
The feature of the meeting was a paper on the Pennsylvania State Public Service Commission, read by J, W. Ledoux, Consulting Engineer, of Philadelphia. Participating in the discussion of its contents were John C. Trautwine, Jr., Philadelphia; John W. Goodell of Montclair, N. J., and B. C. Little of Rochester, N. Y., who is a candidate for election to the office of national president of the association. Charles Wood, secretary of the Four-State Section presided over the meeting.
Mr. Ledoux’s paper is a valuable contribution to the literature of the subject of the Valuation of Public Utilities, and his conclusions were somewhat startling inasmuch as he recommended the public ownership of water works utilities as the solution of the many difficulties in the way of financing in this era of drastic state regulation. After describing the uncertainties involved in attempts at valuation by the various methods or combinations of methods seemingly employed by the Public Service Commission, he pointed out that the depreciation of the currency incident to the financing of the war had revolutionized methods of valuation. For instance, while the Historical Value or cost of original construction of a utility is constant, the estimated cost of reproduction is variable, and is today three or four times what it was five years ago. When the Knoxville decision of the United States Supreme Court, wherein the so-called Present Fair Value was established as the standard of valuation of public utilities, the taxpayer was well fortified in his belief that Estimated Cost of Reproduction was a fair base for the establishment of water rates. This, however, happened before the abnormal rise in price had commenced.
* * * Present Fair Value could not be measured by Historical Costs neither could it be measured by the market value —because the market value was not only indeterminate but was now to be radically changed by the decision of the commission as to what were to be the rates, so therefore the only resource was to obtain an estimated cost of reproduction, which would generally be considerably below the historical cost. As the estimated cost of reproduction was necessarily based on a new plant, in order to find the estimated cost of a plant like the one in existence a material deduction had to be made for depreciation.
This idea seemed to meet the approval of all those who were interested in preventing unduly high valuations. However, the Supreme Court had stated that in arriving at the Fair Value the elements of Cost of Reproduction, Historical Cost and Market Value of Stocks and Bonds were all to be considered; but the earlier decisions indicated that the cost of reproduction less depreciation was really the criterion. Many students of this subject saw the fallacy of that view, and the writer presented a paper before the Pennsylvania Water Works Association, at a meeting in October, 1914, advocating the adoption of the actual investment as the only fair basis of valuation for the rate regulation case. While this view was generally unacceptable at the time, it would have been received with much more favor if it were not for the ramifications of past organizations and reorganizations, mergers, stocks and bonds issued in some cases for physical property, in other cases for good will or influence, and in still other cases for caprice, and occasionally for no assignable reason whatsoever, so that from the minutes or books of the Company it sometimes became a hopeless task to get within gunshot of what the actual investment really was. In all cases it was necessary to resort to Estimated Cost of Reproduction, which although arduous, entailing vast labor and expense, only limited by the will of the appraiser and the consent of the company, produced definite results. Then it was seen that the cost of reproduction could be vastly different, depending upon what period of time was taken for the construction. Prior to 1916, cast iron pipe, which constitutes such a material element in water works building, varied from $15 to $40 per ton and other items also were subject to similar fluctuation.
The Supreme Court decision made Present Fair Value the criterion and if the Cost of Reproduction were to be used as a measure of Present Fair Value, it must necessarily be based on present cost; therefore the valuation of a water works was dependent upon the prices existing at the time the appraisal was made. It was then realized that * * * * Cost of Reproduction fluctuated from month to month. Then came the world war * * * * and the principle of the Present Fair Value received a severe jolt as a measure of valuation for the Rate Base.
At the present time there seems to be a strong tendency to give more and more weight to Investment and less to Estimated Cost of Reproduction * * * *.
Rate Base: It is supposed that The Commission arrives at its determination of a Rate Base by sub-dividing the two main elements as follows:
Reproduction Cost less Depreciation.
Reproduction Cost less depreciation plus Going Value.
Historical Cost of Physical Plant.
Historical Cost plus Development Cost.
Historical Cost based on Securities Issued.
Historical Cost plus Development Cost based on Securities.
Mr. Ledoux then described the details of the various ways of determining values and rates, such as price per foot or per mile per inch of diameter, instead of the usual procedure of charging per mile of main for all main from four inches in diameter up. The principal of the Ready to Serve charge, applied in cases where the consumer is connected up to the mains, but uses no water, he said, has resulted in objections by consumers, who are accustomed to the old form of Flat Rates and Minimum Meter Charges, on the ground that they believe they are paying for something they do not get. Mr. Ledoux’s conclusions follow:—
In conclusion it would seem to the writer that while the Public Service Commission at the present time desires to be fair to water companies, the practice in past years has been to scale down the Rate Base to an unreasonably low figure, and while the allowance in percentage of from seven to eight per cent., cannot be considered as unreasonably low, when viewed from the standpoint of prevailing returns on capital, the general effect has nevertheless been confiscatory, which is proved by the disrepute into which water works credits have fallen among those bankers and trust companies who have in years gone by looked upon them as sound and safe. Water works stocks or bonds should be at least as desirable as those of a manufacturing plant, but their discredit among those financial underwriters who established the market is notorious, and when questioned the answer is invariably to the effect that no sane investor will go into a water works deal unless the returns are unduly high and give assurance of permanence, which, under the drastic regulation by Public Service Commissions to which they are subject, is obviously out of the question. It therefore becomes impossible to raise capital to put in the necessary improvements to maintain satisfactory service unless the owners of the utility are liberal and fortunate enough to invest their own savings in the enterprise, which does not often happen, and hence the public suffers really more than the utility, and the healthy growth of the community is discouraged.
When the average man on the street hears that the Public Service Commission allows a particular utility seven or eight per cent, return, he jumps to the conclusion that the allowance is unduly liberal, remembering that first-class investments pay only five or six per cent, and there is some ground for his conclusion. But if the Commission could be always counted on to base its valuation on the legitimate investment without deduction for Depreciation, for Property Obsolete, or Not Used and Useful and with a fair allowance for Development Cost, then a return of six per cent., or even less, for utilities would be eventually as attractive to investors as it is now in office buildings, ground rents and municipal securities. The logical and practical remedy for all these difficulties is Municipal Ownership. The properties can be taken over by agreement or eminent domain. Securities can be underwritten at the same rates as municipal bonds, and the improvements can be installed whenever desirable; Municipalities can then adopt such rates, rules, standards of service, water quality and policies regarding extensions as they deem expedient.
In municipal ownership, it is obvious that the rates must be sufficient to pay for all plant account, depreciation, operating expenses, past losses, whether due to property no longer used and useful, loss of interest during operation, obsolescence or other costs due to errors of design or construction and even gross carelessness. The public must make good. Then why should the Commission not take about the same view of it when the works are operated by a water company?
In the discussion that followed, John C. Trautwine, Jr., suggested that as a practical method of determining the physical and going value of a utility that it he put at public auction to the highest bidder. The price thus determined to be the base for the establishment of equitable water rates.
The meeting then adjourned until the next National Convention in Montreal in June. Among those present were the following:
Attendance at Meeting
D. E. Dampman, Reading, Pa.
Emil T. Neubling, Reading, Pa.
Bert. B. Hogdman, New York.
Geo. H. Felix, Reading, Pa.
H. L. Campbell, Lynchburgh, Va.
J. F. Atwell, New York.
Isaac Walker, Chester, Pa.
T. D. Faulks, New York.
M. B. Rudderow, Merchantville, N. J. Frank S. Fithian, Camden, N. J.
John S. Warden, New York.
W. D. Filbert, Reading, Pa.
C. E. Will, Lancaster, Pa.
J. F. Brainard, Lancaster, Pa.
George Fordney, Lancaster, Pa.
J. O. Herry, Atlantic City, N. J. Guy H. Davis, Harrisburg, Pa.
S N. Van Trump, Wilmington, Del. Charles R Wood, Philadelphia.
L. S. Barnard, Buffalo, N. Y.
H. E. Shenton, Philadelphia.
Walter Wood, Philadelphia.
C. E. Becker, Philadelphia.
W. F. S. Russell, Philadelphia.
Hugh McKay, Philadelphia.
F. C. Harmstad, Philadelphia.
Daniel McCrudden, Philadelphia.
Frank McHugh, Philadelphia.
Seth M. Van Loan, Philedelphia.
Edward Brinkley, Lancaster, Pa.
V. E. Arnold, New York.
E. S. Cole, New York.
J. W. Turner, New York.
L. P. Anderson, New York.
L. Van Gilden, Atlantic City, N. J.
Marshall H. Pugh, Wayne. Pa.
W. L. Savage, Philadelphia, Pa.
Jos. B. Anderson, Philadelphia.