WATERWORKS FRANCHISES*

WATERWORKS FRANCHISES*

Maurice H. Robinson

The most striking fact that arrests one’s attention, when studying the problems connected with the supplying of water to urban communities. is the steady, persistent and fairly rapid tendency towards the ownership and operation of such public utilities by the municipalities immediately concerned. A century ago a very large proportion of the waterworks then existing in the United States were operated by private companies. By the middle of the last century due partly to the conversion of private works to public works, and partly to the original establishment of public works, 40 per cent. of such establishments in the United States had become public, while 60 per cent. remained private. By 1900 the percentages were approximately reversed, 60 per cent. being public works and 40 per cent. private. Moreover, owing to the fact that the larger cities generally supply water directly to their residents, somewhere between twothirds and three-fourths of all the people living in the cities of the United States were in 1900 using water supplied by the municipal government in which they lived. At the present time this tendency is shown in a striking way in th_____ State of Illinois. While I have been unable to obtain accurate statistics, it seems that at the present time at least three-fourths of all the waterworks in the State of Illinois are owned and operated by the municipalities, while approximately 90 per cent. of the urban population are served by municipal water systems.

The tendency towards municipal ownership of waterworks is in striking contrast to that shown in the ownership of gas, electric lighting, street railways and other utilities. The causes for such a movement are plain in certain particulars and obscure in others. In the first place, furnishing water to an urban community is the most complete of all monopolistic undertakings. More over, a monopoly controlling the supply of water is in a very different position from one controlling the supply of gas, electric lighting or street railway transportation. Residents can live without gas, without electric lights and without street railways; but they cannot live wihout an adequate supply of fairly pure water. It is physically impracticable to furnish pure water except through a central supply station, and again it is economically impracticable to have two companies supplying the same area. Consequently the citizens of any urban community find themselves as a matter of fact dependent upon the water company for their water supply. A monopoly i_____ water, while partaking of the characteristics of monopolies in general, has an opportunity to apply the principles which underlie the operations of all monopolistic industries with the greatest opportunity for causing public harm, and at the same time the greatest opportunity for earning monopolistic profits. An arbitrary limitation of the supply of water in any community will always prove harmful to the persons resident within that community. At the same time within certain limits it will also increase the profits of the company operating this particular form of monopoly. Increased profits enhance the value of the plant and establish a fictitious value on the property through which the increased profits are reaped. The owners of such a mouopoly naturally are vitally interested in maintaining it in operation and in receiving an equivalent for the future probable profits in the selling price whenever the municipality determines to take over the ownership and operation of the plant Consequently there is an eternal and never-ending conflict between the holders of the franchise and the residents of the community supplied with water by a private company.

In the second place, no equitable method of ad justing the economic relationship between the private company and the public interest has as yet been devised. If it were possible to satisfactorily adjust such relationship, normally at variance, it would make little difference whether the water were supplied by private companies or by the municipalities. As a matter of fact, there would be certain advantages in having the water supplied by private companies or by the municipalities. As a matter of fact there would-be certain advantages in having the water supplied by private companies, because it is a well-known fact that at the present time a private company is in a position to manage such a business enterprise with greater efficiency and greater economy than any municipality. Any economy of operation, under a proper adjustment of the economic relationship existing between the city and the company, would operate to secure not only added profits to the proprietors, but cheaper water and better service to the residents of the city.

* Professor of Industry and Transportation, University of Illinois.

Furthermore,it is, I think, generally admitted that the less a city enters into the operation of business affairs the better is it enabled to protect rights and the political privileges of its citizens. A mixture of economic and political functions in the same government must of necessity tend to lessen both the efficiency of the business operations and to pervert the character of the political functions.

In order, therefore, to make the operation of private waterworks not only advantageous to the owners, but also to the residents of a city, the nature and character of the franchise contracts between tbe city and the private company, and the methods by which the obligations which the companies undertake under their franchises are enforced become of the greatest importance, and need at the present time radical adjustnient. A franchise is essentially a contract between a prtvate company and a city by which the company recs to supply a given service to a community in a price, and the community through its official organization agrees to guarantee the rights of the franchise and to see that the obligations are reguarly and efficiently performed. In some cases this franchise is granted by the state to the private company, permitting it to operate under certain terms within a particular municipality. Sometimes the state permits the municipality to enter directly into such a contract with a private company. In cerain other cases both the city and the state must approve the terms of the contract before it becomes legal and binding in its obligations.

In the early period of central water supply companies franchises were often granted in perpetuity. Such grants were made with little regard for the future, and are at the present time practically unknown except as relics of the past. Later the usual method was to grant franchises for a period of from 20 to 50 years, sometimes shorter and sometimes even longer than this. These limited period franchises received the unqualified approval of the committee of the Civic Federation, which reported in 1907 on the relative advantages and disadvantages of the municipal as compared with the private operation of public utilities. On the surface such franchises seem to be entirely proper, and have, therefore, been generally adopted. It is, however, almost an economic axiom, and therefore hardly open to argument, that no city and no private company is in a position to make a contract that will equitably bind both for 20, 30 or 50 years from the present time. Moreover, the enforcement of such contracts has always proved to be impossible, and hence many supplementary acts modifying the original terms of the franchise whenever the original becomes inequitable from the standpoint of either the municipality or the private company, have been added as a matter of course.

Owing partly to the dissatisfaction caused by term franchises and partly to the political manipulation that has been necessary in order to secure changes in such franchises, there has grown up a considerable movement in recent years for the indeterminate franchise, such, for example, as that adopted in 1907 by the State of Wisconsin. The indeterminate franchise is one that continues in force until such time as the municipality granting it exercises its option to purchase the property and operate it directly or to terminate the franchise in accordance with the provision of the general law under which the franchise is granted. The indeterminate franchise has certain advantages over the term franchise which are likely to prove of distinct benefit both to private companies and to their patrons. These advantages are so great that a number of the public utilities corporations in Wisconsin have voluntarily changed by giving up long-term franchises in order to get the benefits of the indeterminate franchise.

The indeterminate franchise looks towards the permanent operation of the public utility concerned by a private company, and as a matter of fact so long as the private company operates the utility with due regard for the public good there is found to be little tendency to exercise the option which the municipality possesses of purchasing the property.

On the other hand, the private company under the indeterminate franchise requires constant regulation in the interests of the public welfare Consequently it is necessary to establish a somewhat elaborate system for the purpose of adjust ing the economic relationships of the cities and the companies through a public commission of experts in the various lines in which the utilities operate. Under the Wisconsin system a public utilities commission is appointed by the governor with the consent of the senate, each member serving for a period of six years. The commission consists of three persons, and one member of the commission is appointed biennially, thus preserving the continuity of the commission even though the individual members change at the end of each six years. The commission at the present time is essentially non-partisan in character, being composed of experts of the highest standing in the various lines of work entrusted to their supervision. Moreover, the commission is empowered by the act to employ technical experts for the purpose of making valuations, in vestigating rates charged by the public utilities companies and the services rendered. It may undertake an investigation either on complaint o_____ persons interested or on its own motion. In order that it may have a proper basis on which its orders are made it is given power to prescribe and establish a uniform system of accounts for public utilities, to undertake the valualion of plants and to enforce its orders, subject, of course, to review by the courts. Behind the public utilities commission is, of course, the power and resources of the state administration

The Wisconsin system, it will be observed combines two features that are essential to an equitable operation of any private monopoly namely, it permits each city to determine whether it will entrust the operation of such works to a private company or to its public officers, and further, it permits any city to change from private operation to municipal operation whenever the former system proves inadequate or unjust provided it is in a position to purchase the works of the private company at a fair valuation.

In the second place, it provides an impartial body, aided by the service of technical experts in every line in which public utilities are operating for the purpose of continually and perpetually adjusting the economic relationships between private companies and the municipality. This insures in the first place that the public are protected against the economic injustice that normally resuls from the private operation of monopolistic enterprises; and in the second place it guarantees to the private company a fair and reasonable return upon its investment. It is practically impossible to provide, through term franchises fixing the rates and the quality of the service, that a fair contract will be insured to both parties through a long period of years. It is impossible for any municipality, except the few very large ones, to employ a force of experts who are in a postion to guard the interests of the city and of the company. The state is not only in a position to do this, but it is also in a position to enforce its orders. Such a commission, representing the public interests, is not likely to unduly favor private companies, and, moreover, it cannot make and enforce orders that would prevent the private water companies from earning a reasonable return upon their investments, owing to the legal protection afforded by the courts.

In view, therefore, of the failure of the present system, a system unable to secure either propel service or equitable rates, and which has been a source of constant political corruption, it seems inevitable that if the public utilities, especially water companies, are to remain in the hands of private companies some system based upon the ideas now being carried out in the Wisconsin system must be inaugurated in each of the states Such a system should provide for the following

  1. A state public utilities law, fixing the general conditions under which franchises may be granted, prescribing the duties of the commission and granting them the right and the power to rescribe a system of uniform accounts, to make physical valuation of the plants and to make _____nd enforce their orders providing for adequate service and reasonable rates.
  2. Under the general terms of this law any city may enter into a contract with a private com_____any to furnish it and its citizens with water, gas, electricity or any other form of public service provided by the public utilities corporations These franchises should, before becoming valid _____e approved by the state public utilities commission for the purpose of seeing that they are drawn up in accordance with the state public _____tilities law, and that both city and private com_____any are insured an equitable contract.
  3. Franchises drawn under the state public _____tilities law would provide in general terms that the private company furnish water or other _____tilities in accordance with the provisions of the franchise, subject to the regulation of the state public utilities commission.
  4. In order that both the private company and the city be interested in the economical operation of such company, some profit-sharing element should be introduced into the general fran chise, which should be a specific contract between the private company and the city. To illustrate Every private corporation is interested in furnishing its services economically to the public, since it normally receives the benefit following from the introduction thereof. In the supply of public utilities under a franchise it is too often the case that the private company introduces economies resulting, first, in large profits, and, secondly, in a political cry for lower rates; in many cases the political cry is so strong that either all incentive is lost to introduce such economies in the future, or the entire results of the economies go to the public in better service or lower rates.

It would be feasible under such a system to provide that the profits resulting from economies inaugurated by the company be divided between the company and the city. For instance, two thirds might go to the company and one-third to the city. Further, there are certain economies that result from the growth of the city—larger consumption of water without a proportional extension of plant, etc. Under a fixed franchise system the results of such economies increase the profits of the company. Such profits should be divided, one-third, perhaps, of the results going to the company and two-thirds to the city

If such a system were generally carried out every private company would be interested in operating at the greatest efficiency, and the citizens in every city served by a private company would be equally interested in securing such economies as they might be able to make. Under the operation of such a franchise it is probable that in most cases the public utilities might be furnished by private corporations at less cost than under any system of either private monopolies with the ordinary franchises or under the municipal ownership and operation. Such a system would also take the franchise question out of local politics, entrust the enforcement of the contract to experts and make both the city and the company equally interested in an economical and efficient operation of the plant. Such a system demands state regulation, efficient accounting, expert appraisal of property and a scientific knowledge of the laws and principles of economics as applied to business operations

Unless some system embodying these principles can be devised in the immediate future it is probable that most of our public utilities will be in the hands of city authorities within a comparatively limited period. If such a system can be devised and accepted by private companies in good faith, and if the states in their turn will appoint men of the highest standing and the best scientific training on such commissions it is possible that the present situation will be continued, marked economy in operation achieved, resulting in lower rates and better service, and the cities will not only be freed from political corruption arising from the unfortunate franchise relationships, but a higher standard of public service will be inaugurated and maintained.

Weleetka, Okla., is in a bad way as to water supply. The citizens made complaints against the service of the water company and the purity of the water served and the manager, it is reported ordered the shutting down of the waterworks. Consequently the city is without fire protection and water to supply the town for domestic purposes is being hauled in wagons.

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