THE RELATION OF THE RAILROAD TO THE CITY WATER PLANT
During the year ending June 30, 1916, the Illinois Central purchased water amounting to over $100,000 from thirty-four water plants in Illinois alone. Using the water purchased by the Illinois Central in this State as a basis the railroads of the United States purchase annually from city plants over $10,000,000 worth of water. This represents no inconsiderable proportion of the revenue from the operation of these water plants. The consumption of water for all purposes by the railroads of the country is estimated to be nearly 700,000,000,000 gallons per year. Compared with this enormous figure the water purchased from city plants is small, and it would appear that the railroads are undeveloped as a field for the sale of water. This brings up the question as to what should be the relation of the railroad to the city water plant. Should it be the same as that of the ordinary householder using only a few thousand gallons, or that of a large, long hour, high load factor consumer, whose business permits of utilizing the reserve pumping capacity, thereby increasing the efficiency of the plant. The cost of supplying water may be divided into two charges; first, the fixed expense or cost of readiness to serve, which remains the same regardless of whether the plant is operated to full capacity or not; second, the operating expense which varies with the amount of water pumped. Assuming the plant has ample reserve capacity the cost of furnishing w’ater to the railroad or other large consumer will consist of the fuel, chemicals, oil, waste, etc., and any return in excess of the actual operating expenses for such water furnished may be applied to the reduction of the overhead expense, to other consumers. The fallacy of a universal rate for water to all consumers regardless of consumption is recognized by most water works managers and sliding scales of rates are established in many instances. These rates are, of course, based upon all expenses, fixed and otherwise, and do not provide for differential treatment of large consumers where it is necessary to make certain concessions in order to hold the business or secure new custom. No better exposition of the advantages of differential treatment of customers can be given than that of Knowles and S-harff in their paper on “The Relation of Out-of Pocket Cost to Rate Making” in the proceedings of the Illinois Water Supply Association, 1914, as follows: “There remains, then, only the second basis which seems to us proper as a reason for differential treatment of consumers—in order to lower the cost of other consumers by retaining custom .which would otherwise be lost. How this works out may be very readily explained. Assume a small water works with a gross income of $35,000, which must be collected when it is supplying 1,000,000 gallons per day. Now suppose one large consumer using 100,000 gallons per day and paying $3,500 per year should find that he could secure water elsewhere at a cost of $2,500 per year, and should disconnect from the mains. The amount supplied would drop to 900,000 gallons per day; but interest, depreciation and maintenance would remain practically the same. It would be necessary to have the same number of engines and firemen; and the only saving would be a small amount of furl, alum, hypochlorite, oil and waste, etc., which would certainly not be in excess of $1,000 per year and would probably be a great deal less. So that the gross income to be raised might be reduced to say $34,000, all of which would have to be raised from other consumers. Now, if all other conditions remained the same, and the rate for the large consumer were reduced so as to just hold his custom, when paying $2,500 per year, the total gross income would still be $35,000 and the portion to be raised from consumers other than the large one would be $32,500 or $1,500 less than in other cases. These rates
could, of course, be correspondingly lower than would be necessary if the large consumer were lost. The advantage of such an arrangement to all of the consumers is obvious, and such differential treatment, if necessary to secure this advantage, would not only constitute discrimination, as we have defined it, but would appear to be a plain duty of the water works as a public utility. In brief, it is to the advantage of all consumers that large, long hour, high load factor consumers be retained. Differential treatment of them does not constitute discrimination, so long as it will result in advantage and saving to other consumers. Such concessions in rates, however, must not be greater than actually necessary to meet the competition of other sources of supply, as in any case, they must not be so great as to increase instead of decreasing the income to be collected from other consumers. Thus, in the case cited above, if it were possible to get the business at $2,500 any rate less than that sum would constitute discrimination. While if it were really necessary in order to meet competition, any rate greater than $1,000 per year would effect some saving for other consumers, and would be justifiable. A rate less than $1,000, however, would make the amount to be collected from other consumers greater than if the large consumer ceased entirely to take service. This would certainly be discrimination under our definition.” In view of the facts as to rate making as brought out above it would appear that in many’ instances more attractive rates could be made the large consumers such as railroads rather than suffer the loss of business that will, perhaps, decrease the income to such an extent as to make it necessary to increase the rate for water furnished the remaining consumers to make up the deficit. Aside from the advantage of the large consumer in keeping dowm the unit cost through absorbing a portion of the overhead or readiness to serve expense, a number of instances might be cited where the acquisition of one or two large consumers has made it possible to enlarge and improve the pumping plant and even construct new plants.