Public Utilities and the National Power Policies 9780231888929

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PUBLIC UTILITIES AND T H E NATIONAL POWER POLICIES

PUBLIC

UTILITIES

AND T H E N A T I O N A L POWER POLICIES JAMES

C. B O N B R I G H T

NEW

YORK

COLUMBIA UNIVERSITY 1 9 4 0

PRESS

COPYRIGHT

1940

C O L U M B I A U N I V E R S I T Y PRESS, N E W Y O R K FOREIGN

ACENTS:

OXFORD

UNIVERSITY

PRESS,

Humphrey

Mil-

ford, Amen House, London, E.C. 4, England, ANO B. I. Building, Nicol Road, Bombay, India; MARUZEN COMPANY, LTD. 6 Nihonbashi, Tori-Nichome, Tokyo, J a p a n MANUFACTURED

IN T H E U N I T E D STATES OF

AMERICA

EDITOR'S PREFACE ITH THE passage of time, great and significant changes have occurred in the political and economic arrangements of mankind. Social relationships have become more complex. In part, because of this complexity, careful work in the social sciences has made it increasingly necessary for scholars to interest themselves in minutiae. Monographs of scholarly merit but of limited social significance have characterized the literature. In economics, especially, there appears to be need for a convenient means of synthesis. While social relationships have become more complex, the rate at which they are changing has accelerated. The world at large appears to be in a state of rapid transition, and economic institutions are no exception to this sweeping movement. No one can hope to understand the significance of change in its entirety; but intelligent minds aspire to see large situations as a whole and in relation to each other. In the words of William Fielding Ogburn and Alexander Goldenweiser ( T h e Social Sciences and Their Interrelations): T h e increasing specialization in the social sciences has been a c c o m panied by greater ignorance as well as by greater knowledge. T h i s handicap has been especially felt because the rapidity of social change in recent years has made it difficult for branches of knowledge in the social sciences to remain within the bounds prescribed under earlier situations. F u r t h e r m o r e , with the rise of the modern emphasis on social research, it has been found that many problems lie in several different fields and that their solution demands methods from the various social sciences. T h e increasing specialization also

EDITOR'S

vi

PREFACE

is part of the great accumulation process in social knowledge. This accumulation process is so great that it has become exceedingly difficult for any one individual to become well oriented in the general field of the social sciences.

The Department of Economics of Columbia University has felt that distinguished scholars would welcome an opportunity to summarize the recent work in their respective fields and to relate this work to other phases of the social sciences. Students in the universities and in the world of daily affairs can gain much from the provision of such summaries. It is with these purposes in mind that a series of lectures on the economics of public policy has been incorporated in the curriculum of the Summer Session of Columbia University. Men and women outstanding in their respective fields were invited to present groups of concise lectures. These lectures represent the efforts of advanced scholars to summarize the recent contributions which they and others have made. These ideas are significant in the shaping of public policy. At the same time, the development of public policy is significant to the course of economic thought. The 1940 lectures, which treat of both phases of this interrelationship, are now published by Columbia University Press as follows: Public Utilities and the National Power Policy, by James C. Bonbright The Pattern of Competition, by Walton H . Hamilton Taxation and Fiscal Policy, by Mabel Newcomer The Search for Financial Security, by Robert B. Warren Labor and the State, by Leo Wolman COURTNEY C .

Columbia August

is,

University ¡94°

BROWN

CONTENTS I. The Control of Public Utilities as a Current Economic Problem

i

II. Rate Regulation under the "Fair Value" Doctrine

12

HII. The Golden Twenties and the Rise of the Holding Companies

22

IV. T h e Power Policies of the Roosevelt Administration 28 V. Public Ownership and Rural Electrification V I . Conclusion

39 56

Appendix: Public Ownership and the National Power Policy

61

Suggestions for Further Reading

73

Index

75

I

T H E CONTROL OF PUBLIC U T I L I T I E S AS A C U R R E N T ECONOMIC PROBLEM

I

the days of the New Deal, when "rugged indij vidualism" was in its heyday, American law followed that of England in recognizing certain types of business as subject to government interference in the interest of consumers. These enterprises were declared to be "affected with a public interest"; or, to use another legal phrase, the persons engaged in these callings were deemed to have "dedicated their properties to a public use." Among such properties were those concerned with transportation—ferry boats, toll roads and bridges, artificial canals, and, later on, railroads. But water-supply companies, inn-keepers, and grain-elevator companies also fell into this same category. Out of this early law concerning businesses "affected with a public interest" grew our modern law of public utility regulation. Out of this law also developed the tradition that the Government may directly own and operate utility properties without fatal offense to the cherished doctrine that the Government should stay out of business. But while these basic traditions have long been well established, the economic and political problems to which they give rise have become more and more critical. And "the public utilONG BEFORE

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ity problem," by which is meant that set of problems raised by the conflict between private profits and social control in regulated industry, is one of the major political issues of the day. A t this point let us note what types of industry are covered by the term "public utilities." Without making a complete list, we must include the post-office business (even though it is a government monopoly), the steam railroads and the local street or rapid-transit railways, the public bus, truck, and steamship lines, the toll bridges and toll roads, the water supply systems, the telephone and telegraph systems, and the central systems supplying gas or electricity. Most of these utilities fall into one of two major classes: ( i ) the various transportation agencies} and ( 2 ) the plants supplying some form of service through a permanent physical connection with the customer's premises. Some writers would also include radio broadcasting and television among the public utilities. But while these services are indeed under regulation by commissions similar to those controlling the utility companies, the problems to which they give rise and the nature of their regulation are unique. F o r convenience, therefore, these newer enterprises are usually set off in a class by themselves. E v e n if broadcasting be omitted, the problems raised by any single type of utility differ so materially from those raised by the other types that an attempt to cover the whole field in four lectures would be quite hopeless. I therefore select for special attention the electric light and power industry. This choice is especially timely, because President Roosevelt has raised the electric power problem to the rank of a major political issue— a rank it has never before attained. A n d in view of the leadership taken by the present Republican candidate, Wendell L . Willkie, in attacking certain phases of the President's power program, a discussion of this program will be of greater interest than would a general treatment of so-called public utility economics.

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By way of introduction, however, some understanding of the nature of modern public utility regulation is essential. For an adequate background I must refer you to the current textbooks on the subject. H e r e I can touch only some of the high points. Modern Utility

Regulation

Viewed from the standpoint of their relations to the Government, public utilities have two characteristics that set them off somewhat sharply from other forms of business. In the first place, they are generally given special privileges not granted to men engaged in so-called private business. Among these privileges, three are outstanding: the power of eminent domain} permission to use streets and other public properties for the extension of lines, pipes, and rails; and a marked degree of protection from encroachment on their territories by rival companies or, until recently at least, by rival public plants. But in the second place, the utilities are under special duties not usually imposed upon other types of business. Among these duties are the obligations to render (a) adequate service (b) at reasonable rates (c) without unjust discrimination among actual or potential customers. T h e modern public service commission, as illustrated by the New York State Public Service Commission or the Federal Interstate Commerce Commission, was created for the purpose of securing the performance of these duties from companies organized under the profit motive. Early in their careers these commissions were given no adequate legal authority to carry out their functions. But the recent trend has been toward the enlargement of their powers. Today, in states having "strong regulation," the commissions have authority to control the management of utility companies in a wide variety of matters. They may order rate reductions or rate increases; they may impose uniform systems

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of accounts; they must approve all new security issues; they must pass on the merits of all reorganization plans; their consent must be secured for any proposed merger of properties; their permission must be had before any given type of service may be abandoned, such as the service of a branch railroad line; they have power to refuse a "certificate of convenience and necessity," without which no company may enter the territory already assigned to another company. Even this list is not complete. In view of what I have said, you can appreciate the facetious remark of a New York utility executive, who once complained that he was no longer permitted to brush his teeth without first getting a certificate of convenience and necessity from Albany. But in actual practice the management of a utility business has been in no such strait-jacket of public bureaucracy as might be inferred from a mere list of legal powers conferred on commissions. For all public utilities have the right to appeal to the courts against orders which they do not wish to obey; and often relief is granted. Moreover, the formalities required before an order may be issued are such that commissioners are impelled to exercise restraint—sometimes excessive restraint—in the interest of their peace of mind as well as in the interest of their limited budgets. The Reasons for

Regulation

Let us now ask why public utility companies have been placed, at least nominally, under so many different restrictions even in a country and in an era which has not favored governmental interference with business in general. More concretely, why does the Government regulate the rates for electric service, although it does not fix the prices of shoes, of bread, of steel rails, or of the very electric equipment which a power company must buy in order to render service?

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One answer, though frequently given, is clearly inadequate. The point is made that public service industries are subject to special regulation because of the essential nature of their services. T h e very life of the community is said to depend on its ability to get these services at reasonable rates and without discrimination. But this answer ignores the obvious fact that other services and other commodities quite as vital to public wellbeing are sold under no similar social control. Food and clothing, coal and steel, housing and household equipment are also essentials of life. Yet in the main these products have been sold without any governmental price fixing parallel to those imposed on railroads, telephone companies, and power companies. A somewhat more plausible explanation is that the utility companies enjoy special favors in return for which they must accept special duties—favors such as those mentioned on page 3. But, in the first place, not all utilities have been given these privileges; and, in the second place, we are still faced with the question why certain types of business, but not others, enjoy privileges denied to ordinary citizens. Clearly, I think, we must turn to a third answer for an understanding of the peculiar status occupied by public utilities in modern law and politics: namely, to the general recognition that public utilities are, to some extent at least, "natural monopolies." By that term is meant not only that the utilities occupy in fact a monopolistic status but also that this status is desirable, if not indeed inevitable. Let us stop here to remind ourselves why the presence of monopoly powers is supposed to make regulation necessary as a safeguard to the consumer. Under the philosophy of individualism, the best economic system is the one in which goods and services are produced and distributed, not under the planned economy of the state, but by private business men whose motives are those of making money rather than of public service. This

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is the philosophy expounded by Adam Smith in his Wealth of Nations and developed by the economists of the "classical school." Even the most convinced and most rugged of these individualist economists, however, have always conceded—nay, have forcibly insisted—that the profit motive cannot accomplish its good work without keen competition among the profit makers. For when left to themselves, business men will charge exorbitant prices, will make shoddy goods, will underpay their laborers, and will fail to press for more and more efficient means of production unless they are constantly deterred from these antisocial practices by the rivalry of their competitors. In short, the true individualist would no more readily leave the individual free from restraint or coercion than would the advocate of economic collectivism. H e would merely prefer the impersonal coercion of market competition to the arbitrary coercion of government officials. To be sure, this emphasis on competition of a direct and unmitigated nature is not the emphasis which one hears in the speeches of American business men when they decry social control and demand freedom from government interference. On the contrary, these business men often oppose the enforcement of the antitrust laws quite as vigorously as they oppose more direct forms of regulation. But one must remember that the pragmatic philosophy of modern American business is not the philosophy of rugged individualism, however much it borrows the popular phrases of the latter. If one seeks a really consistent interpretation of individualism, one must look to some of the academic economists and to a few of the right-wing journalists, not to the men of action who direct the destinies of our great corporations. Even under individualism, then, some form of direct public control of business is concededly necessary in the absence of

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adequate competition. And the particular type of control with which we are now concerned—the regulation of public utility companies—was developed because with respect to these industries the attempt to secure effective competition was deemed hopeless from the start or else was proved hopeless by sad experience. I n the early days of the local utilities, such as the gas, the street railway, and the electric light companies, cities often made strenuous efforts to enforce competition by issuing franchises to two or more companies with the expectation that they would vie with each other in selling service within the same area. Almost without exception these efforts came to grief because of the technological nature of the business. T h e duplication of mains or wires in the same streets proved terribly wasteful and the heavy overhead expenses of a public utility plant led to that suicidal type of rivalry called "cut-throat competition." In consequence, most of these competing enterprises were merged, with or without public approval, and the customer lost his chance to pit one electric company or one gas company against the other as a means of bargaining for the lowest possible rates. As a result of these experiences public opinion became reconciled to the idea that the grant of a public utility franchise means, in effect if not in form, the grant of a monopoly; and it has therefore demanded either regulation or else outright public ownership as a protection against the abuses of a private monopoly. In stressing this natural-monopoly feature of public utilities I am following an orthodox view which might be challenged by some of the more recent writers. T h e point is made that the distinction between the natural-monopoly features of the utility companies and the competitive features of so-called private industry is not nearly as sharp as was once supposed. On

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the one hand, a modern utility business faces keen competition; on the other hand, most of the great private industries enjoy partial monopoly. T o cite a concrete example, although frankly an extreme one, let us compare the business of the Pennsylvania Railroad (one of our greatest public utility companies) with the business of the Aluminum Company of America (one of our largest "private enterprises"). T h e Pennsylvania system must fight for traffic not only with other railroads, such as the Baltimore &'Ohio, but also with buses and trucks, not to mention water carriers and airways. On the other hand, the Aluminum Company enjoys an almost complete monopoly of the pig aluminum business of the United States. In so far as it destroys the sharpness of the distinction between the monopoly features of the utility business and the competitive features of so-called private business, the point just noted is well taken. I am still convinced, however, that when their statements are properly qualified, the orthodox writers are correct in stressing recognized natural monopoly as chiefly responsible for the growth of modern utility regulation. T o be sure, the Aluminum Company of America may have in fact just as close an approach to a monopoly as have most regulated utilities. But, in the first place, this fact—if it be a fact—has not yet received widespread recognition. And in the second place, public opinion has not yet reached the conviction that this business is a natural monopoly. On the contrary, the Department of Justice is now engaged in a suit against the Aluminum Company under the antitrust laws—a suit designed to enforce competition as an alternative to regulation or to outright government ownership. Turning now from the monopoly features of private industrials to the competitive character of the utility business, we must note that this competition is seldom of a type that does away with the necessity for regulation. True, the competition

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g

is often keen—sometimes ruinously keen, as in the case of the street railways. But it is of a very uneven nature in that it operates in favor of certain classes of customers and against the interests of other customers. The early history of railroad regulation well illustrates this point. When the original Interstate Commerce Act was passed in 1887, the railroads had been competing sharply for traffic. As a result, powerful shippers like the Standard Oil Company secured from these railroads heavy discounts or rebates over the rates charged to smaller, rival shippers. Thus there arose a most flagrant kind of "unjust discrimination"—a kind that tends to arise under partial competition far more readily than under complete monopoly on the one hand or simple competition on the other hand. And it was the very fact of this type of competition, rather than the existence of a thoroughgoing railroad monopoly, that led to the successful demand for government interference. I have stressed this point at some length because it runs counter to the position of a number of utility specialists, including Professor Philip Cabot, of Harvard University, who insist that rate regulation, at least in a stringent form, has been made unnecessary by the growth of competition in the field of the utilities. For the reasons just suggested this view seems to me untenable. But the problems of regulation are materially changed by this partial competition; and, unfortunately, their solution becomes increasingly difficult. Why Regulation Is Not Limited to the Setting of Rates and of Service Standards Before closing this brief discussion of the reasons why regulation of utilities was deemed necessary we must try to account for the tendency of legislatures to give commissions more and more control over private management. Since the assumed objective of regulation is primarily, at least, to protect con-

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sumers against unreasonable rates and inadequate service, one might suppose that the powers of a commission would be limited to prescribing rates and enforcing service standards. How, then, do we explain the laws granting other powers to the regulating agencies, such as the power to prescribe uniform systems of accounts, to dictate rates of depreciation for income statements, to supervise security issues, and even (in a few states) to order the withholding of dividend payments? In part the answer is to be found in a desire to protect investors in utility securities against financial mismanagement by Jnside interests. For the most part, however, these extensions of commission authority have been made as prerequisite for rate regulation. Unless corporate accounts are subject to control, neither the commissions nor the consuming public can determine the cost of doing business and the percentage of profits which a utility is making under the rates which it is charging. Unless security issues are supervised, companies are under irresistible temptation to water their stock and to overissue their bonds, with the result that they cannot give adequate service save, perhaps, by charging rates higher than a soundly financed company would need to charge. These conclusions are not the result of abstract theory; they were forced upon legislatures by actual and sad experience. The growth of the powers of the modern public service commissions makes an interesting chapter in the history of American politics. When the bills to establish these commissions were introduced into the legislatures, most of them were bitterly opposed by the companies as "socialistic" measures. Indeed, when Governor Hughes, of New York, supported the passage of the first Public Service Commission L a w , in 1907, utility lawyers flocked to Albany and attacked the bill as unconstitutional. Similarly, when amendments increasing the powers of the commission were later introduced in the hope of

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curing abuses or meeting difficulties not envisaged in the original statute, they too were opposed with vigor. By and large, however, the utility companies now express satisfaction with state regulation and acquiesce in measures such as security regulation, which they once attacked as unnecessary and vicious. Today, they recognize regulation as an unavoidable alternative to public ownership. But they have fought the extension of social control to the holding company; and they have not yet abandoned the hope that the Holding Company Act of 1935 may be held unconstitutional in part. In Chapter I I I I shall say something about this Act and about the conditions that led to its passage.

II RATE REGULATION UNDER FAIR V A L U E "

THE

DOCTRINE

I have given a partial list of the powers of a modern public service commission. If this were a complete treatise on regulation, it would now be in order to study in detail the way in which these powers have been exercised. Regulation of accounts, regulation of securities, establishment of standards of adequate service—each of these functions, along with half a dozen others, would now require long separate chapters. For such a study, I must refer you to the several current textbooks on utility economics. But one important phase of regulation requires attention even in these brief lectures—the regulation of rates. H e r e one finds one of the major sources of dispute between the utility companies and their critics. T h e companies insist, while the critics deny, that rates have been effectively regulated by the state public service commissions. T o repeat a point already noted, one of the special legal duties imposed on public utilities as distinct from private business enterprises is the duty to serve all customers at reasonable rates. In the earlier days this duty rested lightly on most managements, since the Government set up no adequate machinery for its enforcement. But under the precedents established by Wisconsin and N e w Y o r k in 1907, a majority of the states have created public service commissions with the authority to enforce standards of rate making that are reasonable from ..READY

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the standpoint both of the consumer and of the corporate investor. In some jurisdictions the commission may prescribe only the maximum rates, leaving the management free to go below this upper limit if it cares to do so. But the more modern public service laws, like the present Interstate Commerce Commission Act as applied to railroads, permit the commissions to dictate the precise rate schedules. Even, however, if it has full authority to set the rates of companies under its control, a commission faces the problem of choosing criteria to apply in deciding whether the rates which a company wishes to charge are "reasonable." And this is no easy question} for the problem of determining what constitutes a reasonable price at which goods or services are to be exchanged has been a bone of contention since the days of Aristotle. As applied to modern utility service, this problem has been debated at great length in the court room and in textbooks, and any number of solutions have been proposed. Most of the divergent views, however, may be distinguished by their adherence to either of two different standards of reasonableness. According to the first standard, the level of rates is reasonable if it is high enough to yield a well-managed company an adequate, but not an excessive, rate of profit over and above operating expenses and other necessary outlays, including taxes. This is sometimes called a "cost plus" standard—that is, cost plus a fair return to investors. According to the second standard the reasonableness of the rates of any given company is determined, not by the rate of profits which it succeeds in making, but rather by a comparison with the rates charged by other companies or by public plants for similar service. At the risk of using a confusing term, this may be called "the competitive standard." We may get a clearer idea of the broad distinction between these two criteria of price fixing if we apply it to a simple example outside the field of the utilities. Suppose that a cabinet-

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maker has accepted an order from us for a custom-made table, and suppose he delivers the table without first reaching an agreement as to the price that we should pay for it. In negotiating this question of payment, we might settle on a sum of money equal to the actual outlays made by the cabinetmaker for materials, and so forth, plus $2 per hour for his time. In that event, we would be accepting one version of the "cost plus" test of reasonable price. But suppose, on the other hand, that we should take no direct account of the time and money spent on this job and should agree on a payment equal to the price at which we could have secured a table of similar design and workmanship from other sources. Such a price, of course, may happen to yield this particular cabinetmaker an unusually high reward; or on the other hand it may not even return him his out-of-pocket expenses if he has been unlucky or unskillful in executing the order. Consequently, it represents a departure from the "cost plus" standard in favor of the "competitive standard" of price making. In public-utility rate making the attempt to apply either of these alternative standards gives rise to serious difficulties. And in the effort to meet these difficulties, most experts would apply some form of compromise between the two basic tests. But a sharp difference of opinion exists as to which of the two should play the dominant role. Later we shall note that President Roosevelt's muchdisputed "public yardstick" principle looks toward the competitive standard of rate making. But the point that I would now stress is that a qualified version of the "cost plus" test is the one which public service commissions have usually adopted in deciding rate cases. The most important qualification is that public utilities have no guaranty that they can recover even their operating expenses, to say nothing of an adequate profit,

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unless there is a sufficient demand for their service to yield an adequate revenue. It is an open question, about which the doctors disagree, whether public service regulation did not get off on the wrong foot in its choice of the test of cost plus a fair profit as the basic factor in rate control. The objection to this standard is the general objection to all forms of "cost plus" price fixing: namely, that they encourage mediocrity and invite inefficiency on the part of private management. Knowing that their rates are likely to be reduced if their profits seem excessive, companies are under no adequate incentive to practice economies and to make voluntary rate reductions in the hope of increasing the demand for their services. Most of these progressive policies impose not only trouble upon a lazy management but also risks upon the corporate investors; and they will not readily be adopted unless the management sees a chance for "big money" if they turn out happily. The recognized inefficiency of some of the country's largest utility operating companies lends much support to these criticisms. Indeed, nearly all progressive programs of utility regulation include attempts to meet the difficulty in one way or another. But regulation under the standard of cost plus an adequate profit, whatever may be its merits, never even got a fair test, because it was doomed by the thoroughly impractical system of determining fair profits which was imposed upon the country by the Supreme Court of the United States. Under this system, moreover, promising modifications of the "cost plus" standard of rate making, designed to encourage efficiency and to penalize poor performance, have been extremely difficult to apply. Those of you who are already familiar with the subject of utility regulation will know at once that I am now referring to the "fair value" doctrine first proclaimed by the Supreme

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Court in the famous case of Smyth v. Ames (169 U.S. 466), decided in 1898. According to this doctrine, with qualifications that I shall not take time to mention, a utility company has a constitutional right to charge such rates as will yield it a "reasonable return" on "the fair value of the property being used by it for the convenience of the public." And if any commission issues a rate order denying it this right, the order may be enjoined by an appeal to the state or Federal courts. As a result of this court-made "law of the land" legislatures or public service commissions have not been free to develop standards of regulation under which the rates are so adjusted as to yield an adequate return on actual capital investment, with or without special premiums for efficiency. Nor have they been free to adopt any other measure of reasonable profits based on the amount of income necessary to attract capital and to maintain the corporate credit. On the contrary, they have been compelled to decide rate cases by reference to an almost meaningless engineering appraisal of the physical propertiesy'ln theory, this appraisal may result in a low valuation, justifying the fixation of rates at lower levels than would be set under other rules of rate making. And so it sometimes worked out in practice during the early history of regulation. But for many years, the valuations approved by the courts have seldom gone below original construction cost and have often exceeded this cost by a high percentage. T h e most obvious defect, however, of the "fair value" rule lies in its fatal difficulties of administration. Anyone who is acquainted with modern appraisal procedures will recognize the heavy expenses, the time-wasting efforts, and the controversial nature of an attempt to value complex properties like those of the Consolidated Edison Company of New York or of the Commonwealth Edison Company of Chicago. These difficulties are multiplied when the results of the appraisal that is reached by a commission are then appealed by a dissatisfied

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company—first to a lower court, then to an appellate court, and finally perhaps to the Supreme Court of the United States. Small wonder that in each of the two recent cases concerned with telephone rates throughout New York State and Illinois, the controversy between the commission and the company was not finally settled for ten years, and then only after the expenditure of many millions of dollars. By that time changing conditions had made the whole settlement obsolete. Partly, I suspect, because of its very tendency to cripple effective public control over rates, the "fair value" doctrine has been strongly supported by utility officials and company attorneys. Indeed, the fear that it may be modified, if not renounced, by the present Supreme Court is one of the reasons why some of the newer members of this Court are not popular in the utility world. How, then, have the utility spokesmen defended a rule that seems so unworkable in the light of experience? The defense rests largely on the argument that the "fair value" rule is not the normal method of rate making. Instead, the rule is said to be merely a refuge for companies against the arbitrary action of commissions that decline to settle rate questions in a fair manner. In the great majority of cases rates are reduced or raised as a result of friendly informal negotiation between the commission representing the consumers and the company management representing the investors. Only if the commission proves unreasonable in an effort to win the political support of the small consumers will a company stand on its constitutional right to a "reasonable return on fair value." This right is actually exercised only on rare occasions, as is proved by the fact that only a fraction of the country's utility properties have ever been officially valued for rate-making purposes. This is a plausible defense of regulation in its actual operation. But it ignores two serious objections to which the defenders have never given adequate answer. In the first place, it

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suggests no standard of reasonableness, alternative to the "fair value" standard, as the one which is or should be applied as the normal rule. And in the second place, it assumes that the temptation to be unreasonable is all on the side of the commissions rather than on the side of the companies. For the reasons just suggested I am convinced that the "fair value" doctrine, as hitherto interpreted by the courts, has gone a long way toward bringing regulated private ownership into disrepute. This, at least, is the opinion of many experts who do not speak for the utility industry. And even a few utility executives have shown signs of awareness that unless the doctrine undergoes drastic modification it may promote the recent movement toward outright public ownership. Before leaving this subject of rate regulation, I must call attention to the most plausible of all the arguments that are made on behalf of the private companies. The point is made that, either because of regulation or perhaps in spite of it, the electrical utility companies of the country have to their credit a history of rate reductions unparalleled by the price trends in any other great industry. In support of this claim the spokesmen for the industry have published graphs which indicate that during a period in which general commodity prices have risen the country-wide average of rates charged to small consumers has gone almost steadily downward. The inference to be drawn is that the electrical industry is the last industry that can fairly be attacked for imposing unreasonable charges upon consumers. On the contrary, it deserves first prize for its accomplishments—a higher prize than should be awarded to any of the more competitive forms of business. This is an impressive claim, and one which might be urged with a good deal of supporting evidence. Indeed, I believe that it has sufficient basis to warrant a continued lease of life for private ownership as one of the important forms of organization in the electrical-utility field. Yet the claim is exaggerated j

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and as a plea for the abandonment of the newer programs of public ownership, it will hardly stand analysis. First let me note that the extent of the rate reductions made during the past twenty years or more is by no means as great as the utility propaganda would indicate. Most of the charts used in proof of these reductions base their rate index on average revenue per kilowatt hour, not on actual rate schedules or "typical bills." As a disclosure of rate trends, such averages involve a statistical fallacy that is well recognized, although I will not take time to discuss it here. More important, however, is the fact that the downward trend of rates has taken place in a period of revolution in the technique of electrical generation and distribution. For example, the amount of coal required to produce one unit of energy is only a fraction of that required twenty years ago. Along with these striking reductions in operating costs has gone a great increase in the use of electricity because of the development of household equipment such as the electric refrigerator. This increase has improved the load factor and has still further reduced the cost of supplying the service. Under such circumstances any company that failed to make striking rate reductions would be guilty of gross mismanagement. Indeed, other types of private utilities, such as the gas companies and the street railways, although under the same form of regulation and often under the same managements as the electric properties, have made no similar rate reductions. What I have said is, of course, of a negative character and does not disprove the claim that electric rates throughout the country are reasonable; it merely weakens the force of the affirmative evidence. But other data strongly suggest that in many areas rates are still much too high. Comparisons of rates charged for similar service in different areas show a surprisingly wide spread between the higher-rate and the lower-rate levels. And among the leaders in the lower-rate range are a

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number of municipal plants, such as those of Seattle and Tacoma, Washington, those in the T V A territory in the Southeast, and that of Jamestown, N . Y . , not to mention the public Ontario Hydro-Electric system of Canada. Private utility spokesmen are not in the habit of throwing bouquets at the managements of these public plants. On the contrary, they are likely to throw heavier and more solid articles. Yet some of these plants have a record of rate reductions unequaled by the private companies. And, contrary to their critics, this favorable record cannot be explained away on the ground that the plants are subsidized or that they fail to contribute government revenues equal to the taxes paid by the private companies. Recent studies made by the Federal Power Commission do not support any such contention with regard to the municipal plants of the United States. And an analysis that I have recently made of the Ontario Hydro-Electric system fails to bear it out as applied to that great Canadian experiment in public ownership. But even if we ignore the performance of the public plants and compare merely the rates of private companies serving different areas, we find striking differences in the levels of these rates. T o be sure, some of these differences are accounted for by cost factors beyond the control of the management. But others are clearly due to different degrees of efficiency in finance, in operation, and in public attitude. T h e point that I am making is that the best performance, not only of many public plants but also of a number of private companies, is so far above the average performance and so much farther still above the poorest performance as to indicate that there is great room for improvement even without new developments in modern technique. And here, it seems to me, public service regulation has failed to accomplish as much as might fairly be expected of it. F o r commissions, with a few notable exceptions, have been either unwilling or unable to stimulate or to coerce the laggard companies to follow the pace

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21

set by the leaders. In large measure, though by no means solely, the cumbersome "fair value" rule of rate making must be held responsible for this failure. One more point deserves mention as a comment on the recent downward trend of rates in this country. This trend has been notably quickened by the establishment of public plants and even by the mere threat of public ownership. For example, the Commonwealth & Southern Corporation, which now correctly asserts that its rates are well below the country-wide average, reduced the rates in its Southeastern territory just at the time when the T V A was becoming a "going concern," in 1933. I am told that more recently the company serving Cincinnati, Ohio, was led to introduce a thoroughgoing program of rate reductions partly under the threat that a public plant might "invade" its territory. Some years ago the Cleveland Electric Illuminating Company, which was then charging very high rates and which had successfully fought against a regulatory reduction on the ground that it would be "confiscatory," was faced with competition from a new municipal plant. Down went its rates; but it continued to do a prosperous business. And in Washington, D.C., the Potomac Electric Company changed from a policy of high rates to one of notably low rates under a program which it accepted only after certain senators had proposed a Federal power plant on the Potomac River. In all these instances the results were accomplished by side-stepping the "fair value" doctrine. Yet these results were probably favorable to the companies, in the long run, as well as to the rate payers. But we must now leave the subject of rate regulation and turn to the story of the public utility holding company.

Ill T H E GOLDEN TWENTIES AND THE RISE OF THE HOLDING COMPANIES

A

LTHOUGH the partial breakdown of regulation under the «. dead weight of the "fair value" doctrine was a major source of the discontent which led to the President's new power policies, its influence on the public mind was indirect. Rate control is not a subject of sidewalk conversation, and only a f e w consumers could be expected to take an interest in highly technical arguments about its administrative and legal machinery. Indeed, during the H o o v e r administration bankers and utility executives cited this fact, along with the point that electric bills are a very small part of a household budget, in support of their hopeful prediction that "the public utility problem" would never become a great political issue. This complacent forecast might well have proved correct had it not been for the financial policies of the holding companies. In their details, of course, these policies were just as technical and just as far removed from the public comprehension as were the procedures of rate regulation. But after the stock market break in 1929 their results were clear to everyone. T h e crash of the Insull system, which controlled more than 10 percent of the entire electric utility business in the United States, was only the most dramatic example of the gen-

THE

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23

eral financial collapse of the holding companies. Even the financiers who played a part in building up these companies would hardly dare to defend their own past actions. Instead, they have blamed the general stock-market hysteria of the post-war period. Briefly defined, a holding company is a company which is not directly engaged in the business of producing and distributing commodities or services, but which controls such a business through the ownership of stock in operating companies. Thus the United States Steel Corporation, one of the largest industrial holding companies, does not own its steel plants or manufacture steel products. It merely controls these plants through stock ownership in a wide variety of operating subsidiaries. And thus the Commonwealth & Southern Corporation, one of the largest utility holding companies, is not itself a public utility. Instead, it controls subsidiaries that supply electricity, gas, and other services to large areas of the Middle West and of the Southeast. Often, the details of management of the subsidiaries are left in the hands of their own officers and directors, although practice has differed on this point. But broad questions of policy, including programs of financing, of construction, and of rate making, have usually been kept within the control of the central office. As a result, this form of organization is characterized both by large scale and by remote control. Lest it be inferred that the utility holding company has been an unmitigated evil, I hasten to say that it has often brought great advantages to the local companies under its control. Indeed, in its earlier history, these advantages outweighed the disadvantages in the opinion of many specialists. Broadly speaking, the merits of this system are due to the greater opportunities of large business and engineering organizations. In the first place, the larger systems, if properly financed, can often secure capital on more favorable terms than can small plants. In the

24

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second place, it is possible for a holding company to integrate the distribution plants of small areas by transmission tie-ups and by the construction of central generating stations in locations best adapted for engineering purposes. And in the third place, a relatively large utility system can command abler engineering and technical talent than can an independent company confined to a small town or village. To be sure, all, or nearly all, these advantages can be obtained equally well, and without some of the disadvantages, by an outright merger of the smaller operating companies. But, for a number of legal and financial reasons, the development of great utility systems by the device of the holding company was much easier to promote than would have been a similar development by merger or amalgamation. So far I have shown only the bright side of the picture. The dark side, however, was not long in coming into prominence. For during the stock-market boom of the 1920's the utility holding company became an instrument of high finance that, I surmise, has no parallel in the entire history of American business—not even in the earlier history of the railroads. The ways in which the public utility holding company was used for profiteering are so varied and so complex that I despair of giving any adequate idea of the situation in these brief lectures. Indeed, although volumes of public documents have been published on the subject, no really satisfactory short presentation has yet made its appearance. In 1929 Gardiner C. Means and I prepared a study which we published, in 1932, under the title The Holding Company. But, although this book was then treated by thefinancialpress and by public utility executives as unfairly critical, its shortcomings were of an opposite nature. For at the time of writing, many of the shocking details of holding-company finance had not been brought to light. The first point to note about these holding companies is that,

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25

defying the principles of regional planning and of engineering integration, they took under their control utility properties scattered all over the face of the map—including, in a few cases, the map of foreign countries as well as of the United States. T h e y thereby quickly attained tremendous size without possessing a well-designed form necessary to prevent this size from becoming seriously unwieldy. T h e second point is that in their rivalry with each other to buy up properties they paid exorbitant prices in cash or in securities—prices on which there was no hope of earning an adequate return, except, perhaps, through a levy of extortionate rates upon their customers. T h e third point is that, not being in themselves public utilities and hence being free from any regulation of their securities, they issued grossly excessive amounts of stock and pyramided layers of holding-company debt on top of layers of operating-company securities, thereby causing their own stock to represent a dangerously thin equity. And the fourth point is that they formed service companies to do management, financing, and construction work for their own subsidiaries at unwarranted profits to the holding-company treasury. In these practices the holding companies had the hearty support of the great W a l l Street banking houses, which derived fortunes from their financial operations. T h e y also had the support of leading engineering firms, which controlled several holding companies, such as the Standard Gas & Electric Company, for the sake of creating and retaining profitable customers for engineering service. Not all the electric holding companies, to be sure, committed serious abuses of this nature. But most of them were guilty on some of these counts, and some of them were guilty on all. O f course, a crash of these top-heavy financial structures was inevitable as soon as prosperity gave way to a prolonged period of depression. T h e crash was initiated by the toppling of the Insull empire. Oddly enough, the even more egregiously managed Associated Gas & Electric svstem continued for some

26

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years to have a charmed life. Only recently has it gone into the hands of bankruptcy trustees, with some of its higher executives and of its attorneys under indictment. Although the era of high finance by the holding companies has resulted in the loss of many hundreds of millions of dollars to innocent investors, the direct effect of this finance on the rate payers is still open to question. Samuel Ferguson, the able chairman of the Hartford Electric Light Company, has long been a critic of holding-company managements. Yet he believes that their sins have fallen entirely on the investors and that the rate payers may even have gained, at least temporarily, by the efforts of companies like the Associated Gas to build up a heavy volume of business by promotional rates. A comparison of the rates charged for electric service in holding-company areas with rates charged by independent companies lends partial support to M r . Ferguson's view, since it shows that some of the lowest rate areas are served by holding companies, whereas some of the independent companies are charging high rates. M y own surmise is that the holding companies, by their unsound financial practices, just about neutralized the advantages which they possessed over small, isolated operating companies. But the data for an intelligent opinion on this point are inconclusive. Certain it is that the investors have been the most immediate victims. In giving this brief sketch of the rise and decline of the holding company let me call attention to a strange paradox to which the financing of this form of organization gave rise. For many years it has been a conventional assumption in this country that the investor in public utility securities cannot make the high returns afforded to lucky investors in ordinary business enterprise. Enterprises "dedicated to the public interest," it has been supposed, must rest content with a modest "reasonable rate of return"; and persons who contribute their capital to these enterprises must take the greater security of their investment as

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compensation for a more moderate rate of profit. Ex-President Hoover once gave voice to this position when in denying the need for outright government ownership he declared that private utility companies are limited to a fixed return on their invested capital. Floyd L. Carlisle, chairman of the NiagaraHudson Power Corporation, recently expressed a similar view when, in opposing the passage of certain New York bills in aid of municipal ownership, he said that his companies were supplying "service at cost." Yet the experience of the holding companies in the golden twenties should have exposed the mythical character of this tradition. During this period the stocks of utility holding companies led the whole speculative market. These stocks, as well as the physical properties that they represented, were bought and sold, not as one would buy the 6 percent certificates of a limited dividend corporation, but as opportunities to make unlimited profits. They were bought on the basis of a future earning power estimated by projecting upward the rising trend of previous years. Indeed, even if an investor had wished to take account of actual construction costs or of so-called "physical values," he could not have done so. For the corporate accounts did not disclose the actual construction costs, while only in rare cases were reliable physical appraisals available. In his book Symbols of Government Thurman Arnold mentioned a number of cherished American traditions which, he declared, were largely of a mythical or ceremonial nature. H e might well have included the myth that public utility companies have actually been limited by public service laws to a reasonable rate of profit under any objective, meaningful test of reasonableness.

IV

I

T H E POWER

POLICIES OF

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that the regulation of public utilities, which had such a promising beginning in the first decade of the twentieth century, later met with two obstacles that threatened to defeat the whole experiment. On the one hand, the companies avoided any thoroughgoing control of their rates by invoking the "fair value" doctrine of the courts. On the other hand, they escaped control of their finances and their integration policies by resort to giant holding companies free from government interference. Even the best commissions found their hands tied by these two restrictions on their powers. In addition, most commissioners lacked both the skill and the funds required for effective exercise of those powers which they already possessed. Moreover, in a number of states the charge was widely made, and supported by persuasive evidence, that the commissions had come under the improper influence of the very companies that they were supposed to regulate. As if to make a bad situation worse, the growth of interstate electric transmission created a phase of the utility business over which the state agencies had no control. These flaws in the regulation of private ownership, though first observed by specialists before the World War, received little public attention until the latter part of the 1920's. But their menace was fully appreciated only after the topheavy HAVE ALREADY NOTED

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financial structures of several large holding companies cracked under the strain of the stock-market crash of 1929. T h e time was then ripe for "the public utility problem" as a major political issue. When M r . Roosevelt made his first presidential campaign, in 1932, those who knew his record as governor of New York State were not surprised when he announced a new "national power policy" as a part of his political platform. Already in Albany he had met the utility problem head on. As the successor in office to Governor Smith, he inherited the leadership in a fight against the proposed grant of the unharnessed St. Lawrence River power to a group of upstate utility interests. When a special legislative commission reported on the alleged breakdown of regulation in New York State, he supported the minority report in calling for several drastic changes in the utility laws. In both situations he met strong opposition from the "power lobby" of the state, and he learned much about the growingly bitter clash between the defenders and the critics of the private power industry. I must now jump from the origin of the President's special interest in the problem of the public utilities to the nature of his recent power program, without reference to the history of its development. Familiarity with this program is important, not only because of its timeliness in the present political campaign, but also because it draws so sharp an issue between "conservative" and "liberal" thought in one important sphere of American political economy. The charge has sometimes been made against the " N e w Deal" that, instead of developing a consistent National economic policy, it has blown first hot and then cold, thereby preventing business from adjusting itself to whatever new conditions may be in store for it. This charge has been pressed most forcibly with respect to industrial price fixing. Here the Administration first looked toward a system of "administered prices"

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under the NRA Codes, turning later to a renewed effort to enforce competition under the Federal antitrust laws. Whether this criticism is justified and if so to what extent is a question beyond the scope of our present subject. At all events, no such criticism fairly applies to the Administration's power policies. They may be good, or they may be bad; but in any event, they have taken the form of a consistent and coherent program. To be sure, there has been inconsistency and lack of definiteness in a good many important details; but this limitation is a necessary trait of any program of reform during its early stages of development. All concrete proposals for the cure of defects in regulated private ownership have taken one of two forms: first, proposals to make regulation more efficient; and, secondly, proposals to adopt some form of public ownership. In much of the current literature these two solutions are assumed to be mutually exclusive. No such assumption, however, is necessary. On the contrary, the experience not only of this country but also of other countries indicates that under proper conditions private and public plants can coexist in tolerable harmony and in wholesome rivalry. The latter view was accepted by the present Administration. One may therefore conveniently distinguish between the phases of its power program designed to fortify regulation and those other phases designed to give new life to publicly owned enterprises. But a third plank in the platform does not fit neatly under either of these two main headings—that is, rural electrification. Using this threefold classification, I list as follows the major activities of the present Federal Government in the field of power. T h e list is not exhaustive, and it overlooks the interrelations between the different parts of the program. But these objections to it are overruled by the need for brief exposition.

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Measures designed to make regulation more effective A . Federal control of electric operating companies engaged in interstate commerce B . Attempts to secure the modification of the "fair value" rule of rate making C . Publication of "typical bills" comparing the rates in different communities and areas of the United States D . Federal regulation of holding companies T h e public power program A . National water-power program B . Federal support of public distribution systems Rural electrification

Measures Designed to Make Regulation More

Effective

A. Federal control of electric operating companies engaged in interstate commerce.—At the beginning of this lecture I noted one increasingly serious gap in the jurisdiction of the state public service commissions—their lack of authority to set rates for power transmitted across state lines. A number of companies took improper advantage of this situation; and the loophole was filled by the Federal Power Act of 1935, which gave to the Federal Power Commission partial control over the interstate business of the electric utilities. This effort to close an undeniable gap in state regulation could hardly be attacked directly by "conservative" critics of the Administration. But the details of the law and of its administration have given rise to a sharp controversy that is bound to bedevil the utility problem for years to come. T h e dispute concerns the danger of a conflict between state and Federal agencies in the control of the so-called "local utilities." Many years ago a similar issue arose in the regulation of the steam railroads. Here, the Interstate Commerce Commission finally became dominant even with respect to traffic that is

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inevitable because of the national character of railroad transport. In the field of electric power the problem is more complicated ; for while large-scale generation and transmission will probably become more and more interstate in nature, distribution promises to remain an essentially local business. Despite this difference between the railroads and the electric industry, supporters of "states' rights"—and nearly all utility executives, along with other "economic conservatives" fall into this class—fear that the Federal agencies will gradually usurp the field of regulation until the state commissions are pushed into the background. Needless to say, this fear is widely shared by state commissioners, and it is also expressed by a number of disinterested "liberals" who oppose an overcentralization of government in Washington. The problem is indeed a serious one, although the Federal Power Act, far from creating it, merely faces it frankly. What caused the problem was the recent technological development of the electric power industry. Engineers and bankers who overstep state boundaries must expect politics, sooner or later, to follow their example. As yet the President's national power program offers no adequate solution of this problem. But the administrators of this program, along with its supporters in and out of Congress, are wrestling with it and have made some promising suggestions. One proposal involves the division of the country into appropriate regions, larger than most states, within which the power industry will be organized under the control of regional planning and regulating commissions. Another proposal, which might best be combined with the one just mentioned, is for a sharp distinction between the wholesale power industry and the retail distribution business. The former would be controlled by national or regional agencies; the latter would remain within the province of the state or of its subdivisions. This functional distinction between the two aspects of the electric power

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business has a precedent in the recently created British Grid system, as well as in the Hydro-Electric Power system of Ontario. If it were not too much to expect of a political campaign, one might hope that the spokesmen of the two major parties would discuss the real issues raised by the problem just suggested. But the chances are that, if the problem is raised at all, it will simply become a subject for the familiar doctrinaire speeches on the virtues of states' rights and on the menace of Federal bureaucracy. B. Attempts to secure the modification of the "fair value" doctrine.—In Chapter I I I gave reasons for believing that utility regulation has been seriously handicapped by an impractical rule of rate making—the "fair value" rule of the Supreme Court. This standard for the determination of reasonable profits has few friends among the Washington officials concerned with utility problems. Indeed, in his famous Portland speech, in 1932, M r . Roosevelt himself criticized it and defended an alternative principle—that of "prudent investment." Even the most severe critics, however, have doubted whether legislation rejecting the "fair value" rule would be held constitutional by the courts. Perhaps for this reason as well as for general reasons of caution, the recent Federal utility laws have not set up conflicting rules of rate making, although the earlier Federal Water Power Act of 1920 made a weak attempt to apply the standard "actual legitimate cost" to the regulation of hydro-electric companies. Faced with the problem of adapting regulation to judgemade law, the Federal Power Commission has joined forces with a number of state commissions in briefs and arguments before the Supreme Court asking the Court to reconsider its rulings on the rate base. In addition the Federal commissions have cooperated with the National Association of Railroad and

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Utility Commissioners in a revision of the uniform systems of utility accounts designed to disclose the actual construction costs of the properties, with adequate allowances for depreciation. The utilities have opposed these newer accounting rules on the ground that they imply an attempt by commissions to set up new rules of rate making in defiance of the traditional legal principles. Indeed, this surmise as to the motives behind the newer rules of accounting is probably correct. At least, I hope it is. While its effect has yet to be determined, the action of the President which is most likely to influence the future of valuation cases lies in his recent appointments to the Supreme Court. These appointments have weighted the Court heavily with "liberal-minded" members—a significant fact, since the "fair value" rule, in its recent form, was the work of the Court's more conservative justices. Some utility specialists believe that the Court will soon adopt the "prudent investment" principle in lieu of the rule of "fair value." Others hope that it will take a more flexible position, leaving freedom for experiments with different types of rate control. This latter position seems to me the more reasonable one; and I venture a guess that it will be accepted by the Court in future rate cases. C. Publication of electric-rate comparisons for the entire country.—One of the most important, though least appreciated, aspects of the Administration's power program has been the publication by the Federal Power Commission of "typical electric bills" showing striking discrepancies in the rates charged by the various private and public plants for the same types of service. These comparisons, which had never been published before, have already had a wholesome influence in bringing pressure for rate reductions on companies in the high-rate brackets. Commissions in those states which suffer by comparison have been put on the defensive. I hasten to add that the significance of these comparisons has

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been vigorously challenged not only by the companies with high rate levels but also by commissions that are under the duty to regulate these rates. T h e point is made that local conditions beyond the control of management may justify some companies in charging rates far higher than those charged by companies more favorably situated with respect to operating costs, load factors, and tax burdens. F o r example, the Consolidated Edison Company, which serves New York City, adduces all these factors, along with others, as reasons for its apparently poor record on the score of rate reduction. This is a plausible point. Indeed, no competent expert would assert that the cost of rendering electric service is or can be made uniform throughout the entire country. What is controversial, however, is the extent of these cost differences and the degree to which they are asserted as a mere excuse for inefficient operation or as a basis for concealed excess profits. One may fairly note in this connection that companies like those of the Commonwealth & Southern system, which boast of rate levels well below the country-wide average (rather than well above it as is the case with the Consolidated Edison Company), do not modestly disclaim credit on the ground that their operating conditions are especially favorable. On the contrary, they give the credit to their own efficiency of management. I am told that the Federal Power Commission, whose published rate comparisons gave such a push to this controversy, is now making a careful study of differential costs as a basis for differences in rate policies. Other agencies and individuals have also recently tackled the problem. But the point that needs emphasis is that only after the present Administration came into power was the problem faced in a serious way. Indeed, it could not have been faced in this way without better statistical and accounting data than the companies supplied in their annual reports to the state public service commissions.

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four measures of the Roosevelt Administration that I am listing under the heading of efforts to improve regulation is the one which has met with the sharpest opposition. Already I have spoken of the rise of the holding companies to a point where most of the country's electric business was controlled by a dozen great systems. And already I have mentioned some of the critical evils which accompanied this financial imperialism. So keen was the reaction against these abuses that even some of the most conservative business men and lawyers, who would decry public ownership as the entering wedge for socialism, expressed themselves in favor of the complete abolition of utility holding companies. In the drafting of the Holding Company Act more cautious and, I think, wiser counsel prevailed. F o r the object of this act is to restrict, integrate, and regulate holding companies, while permitting them to perform their useful functions. But it is a high tribute to the political power of the organized utility companies that even in 1935 the act was almost defeated in Congress. Indeed, it would probably have failed to pass but for the exposure of an attempt by the employees of one of the holding companies—the Associated Gas & Electric Company— to influence Congressmen against it by means of " f a k e " telegrams of protest. T h e irony of this derailed effort to influence legislation is enhanced by the fact that the man who first exposed the scandal, M r . Driscoll, then chairman of the Pennsylvania Public Service Commission, is now a trustee-in-bankruptcy of the Associated system. Without going into the details of this complicated act, which is administered by the Securities & Exchange Commission, let me mention six of its main features. First we may note the misnamed "Death-Sentence," Section 1 1 , which calls for the death only of those companies that serve no useful purpose, but which requires the other companies to divest themselves of properties that cannot be integrated into a well-knit system

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of manageable size. Secondly, there is a clause putting an end to the unconscionable practice of the profit-making service charge, whereby holding companies were siphoning profits from their own subsidiaries under contracts for management and for various engineering and fiscal services. Central service organizations may still be retained, under commission supervision ; but they must do business at cost, not at a profit. Thirdly and fourthly, both the accounts and the finances of the holding companies are placed under Federal control, somewhat similar to the control already exercised by state commissions over the accounts and finances of the local operating companies. F o r example, before it may issue new securities, a holding company must first receive the approval of the Securities and Exchange Commission. But not even the commission may permit the pyramiding by holding companies of layers of funded debt on top of operating-company securities—a practice that became fashionable during the 1920's. Moreover, a holding company may not borrow money from its own subsidiaries. Fifthly and sixthly, the commission has control over all proposed acquisitions of new properties} and it must approve all plans of financial reorganization following the bankruptcy or failure of a holding company. So much, then, for the major features of the Holding Company Act—one of the most remarkable documents in the history of legislative drafting. If time permitted, a discussion of its merits would now be in order, with special reference to those who criticize it as a monument of government bureaucracy. This criticism is of special interest because, while most forcibly urged by the utility interests, it is also heard in some left-wing quarters. T h e criticism of the latter is that the holding company is an unmitigated evil and that it should not have been given a new lease of life under government auspices. A more insurgent view is that the Government should devote all its energies to furthering public ownership, leaving the private companies to

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stew in their own juice. And there is still another angle of criticism, though one of a much more moderate nature. T h e belief is expressed that Congress should have given the commission much less administrative discretion in deciding between good and bad holding-company systems. It should itself have dictated the basis of utility integration in objective terms, instead of leaving most of this responsibility to a group of administrative officers. F o r the sake of my own peace of mind I am glad that lack of time gives me a good excuse to dodge these issues. But even if one does not wish to dodge them, confident answers are still ruled out because of our lack of experience with the act in actual operation. T h e test of the act is in its administration; and this test will come only when the commission makes more headway with the critical problem of integration under Section 1 1 . N o one who has wrestled with this problem will deny its formidable nature. And the solution will be made even more difficult by the efforts of most holding companies to retain control of whatever properties are now in their possession. With this brief review of the regulatory aspects of the President's power program, let us now turn to the new developments in public ownership.

V

PUBLIC O W N E R S H I P A N D RURAL ELECTRIFICATION

E

the period of the New Deal public ownership was no stranger to the United States. One of the most important types of utility enterprise—the postoffice business— had long been a Government monopoly. Most of the watersupply systems were run as municipal departments. Some cities owned and operated their street railways; and a few of them ran gas plants. About 5 percent of all central-station electricity was supplied by public systems. In the power field, however, private ownership was the dominant form of enterprise, and the relative importance of the public plants had waned. Indeed, many small communities that were originally served by municipal plants sold their business to the private holding companies at handsome profits to the local treasuries. Needless to say, this dwindling importance of public ownership was cited by the private companies as proof of the superior efficiency of corporate management. The city plants, inefficiently run by cheap politicians, simply could not withstand comparison with private systems operated under modern technique and with vigorous, businesslike initiative. So the argument ranj and it was an argument that won fairly general credence despite denials by the Public Ownership League and other "socialistic" organizations. VEN BEFORE

40

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OWNERSHIP

But a close study of this early history of municipal ownership by persons whose findings were not hopelessly colored by their prejudices did not bear out this sweeping conclusion. It disclosed the fact that some of the best, as well as some of the poorest, performances were to be found among the municipal plants. It also indicated that in the main the larger public plants compared very favorably with those of the private companies, but that most municipal plants were too small for efficient operation and were hopelessly handicapped by their confinement to a single town or village. If their properties could be brought together into an integrated system extending over a wide area, these tiny plants might make a highly creditable showing. This, at least, was the experience in Ontario after the creation of its provincial Hydro-Electric Power system. The Public Power

Program

While governor of New York State, M r . Roosevelt studied sympathetically these proposals to give new life to public ownership, so as to permit of a fair test of its accomplishments as compared to those of private companies. And in his first campaign speeches for the presidency he stated that he would support such proposals if he should be called to Washington. It was not his intention that the electric utility industry should be "socialized" in a wholesale manner. On the contrary, he proposed merely the creation of a number of "public yardstick" systems, whose performance as to rates and as to other characteristics might be compared to that of the corporate utilities. I think that the use of the term "yardstick" in this connection was unfortunate. But the general idea of encouraging public ownership of a type which would permit of a fair comparison with profit-making enterprise is fairly clear and, it seems to me, quite sound. Other factors, however, played an important part in the public power program of the Administration. One of them, which

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41

I shall again refer to presently, had to do with the peculiar advantages of public over private ownership in the development of water power. Another was the great pressure on the Administration and on Congress to plan public works for the relief of unemployment. Had it not been for this latter impelling consideration, a much more gradual and more cautious program of public development would probably have been chosen. Two aspects of this program must be distinguished: the public water-power projects and the Federal support of publicly owned, local distribution systems. A. The national water-power program.—I have just said that state or Federal development of the country's water-power resources has certain special advantages recognized even by those who do not favor public ownership of the electric business in general. Some of these advantages are due to legal factors} others are financial. Here I have time to mention only the one which is most prominent: namely, that water power can usually best be developed in conjunction with other functions of river improvement—functions that are not feasibly performed by profit-making companies. Navigation, flood control, irrigation, and city water supply are among the other services that are often rendered jointly with power in the construction of river dams. The projects of the Tennessee Valley, of Boulder Dam, and of Grand Coulee are examples of these multiple-purpose enterprises. So compelling are some of these considerations in favor of the public ownership of water power that even Ex-President Hoover, despite his firm opposition to socialized industry, was led to favor it as applied to the Colorado River. The first great Federal development of water power for general public use, that at Boulder Dam, therefore took place under his leadership. In a certain sense, then, the origin of the present Federal waterpower policy can be credited or debited to the Republican Party.

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But the policies underlying the more recent developments have been quite different, as the critics of the Roosevelt Administration correctly point out. In the first place, the construction of these projects on a large scale as a measure of unemployment relief was a policy new in the country's history. In the second place, the use of these power projects as a means of influencing electric rates throughout the country suggested a new principle of rate making—that of comparative rate performance, or, in the more familiar but less accurate phrase, that of the yardstick rates. This would be the place to describe each of the great waterpower projects that were initiated or planned for as a part of the President's power program. Of course the most famous example is the T V A , which many liberals regard as the President's (and Senator Norris's!) most outstanding accomplishment and which many conservatives regard as the worst of his crimes against private business. But there are also Bonneville and Grand Coulee on the Columbia River in the Northwest, not to mention many other projects in various areas outside the Northeastern states. In the latter territory the President has favored the development of the St. Lawrence River under Federal ownership of the navigation facilities, but under New York State ownership of the water power. But the St. Lawrence project has met strong opposition from a number of sources and has not yet been initiated. Oddly enough, the most comprehensive description of the newer public power projects is to be found in a book written in sharp criticism of them by a well-known defender of the private companies—Power in Transition, by Ernest R. Abrams, published this year by Scribner's. In a statistical summary he estimates that the Administration's power projects will require an ultimate outlay of about two and one-half billion dollars, almost half of which has already been appropriated, and that they will have an ultimate generating capacity of almost nine

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million kilowatts (twelve million horsepower). This, he says, will mean an increase of approximately 25 percent in the nation's existing generating capacity. I strongly advise you to read this book, not only because of its factual description of the projects, but also because it presents a point of view quite different from that reflected in my lectures. In important matters of detail these differences would be based on disagreement in our interpretations of the facts, or even in our understanding of them. But underlying these differences is a fundamental disagreement as to the economic functions of government. B. Federal sup fort of public distribution systems.—Even most defenders of public ownership generally agree that the distribution of electricity to retail customers is not a proper function for the National Government. Being essentially local, the business should be managed under local auspices. This position has been accepted by the present Administration in Washington. Accordingly the T V A and the other Federal agencies that administer the water-power plants do not supply retail electric service, although in some instances they sell power directly to large industrial users, such as the Aluminum Company of America and the Monsanto Chemical Company. Instead, the power is sold at wholesale for distribution by other agencies, private and public. / Nevertheless the Federal Government has taken an active interest in this distribution and has given aid and encouragement to public distribution systems of several different types. For example, in T V A territory the Federal Authority took the leadership in setting up a large area of public distribution systems, including most of Tennessee. It even financed the purchase of some of these distributing systems from the private companies, later turning them over to cities, such as Knoxville, or to rural districts. In some instances it helped to organize electric cooperatives, like that at Corinth, Mississippi, which

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were to be owned by the customers themselves in a manner similar to that of other cooperative enterprises. Where necessary, the Federal Government financed these public enterprises by loans and even by grants-in-aid of unemployment relief. In the case of the TVA the Federal agency has attempted to retain a certain measure of control over the rate policies of these public plants by means of clauses in their wholesale-power contracts. The chief motive behind this retention of control seems to have been the fear that the city plants, following the practice of so many municipal electric systems, might be tempted to charge high rates in order to yield handsome revenues for the local taxpayers, instead of lowering rates with the object of promoting the full use of electricity. How far this movement toward local public ownership may go in the areas served by the new Federal water-power projects is still an unsettled question. The answer should depend largely on future experience with the actual operation of the present public plants compared to the future record of the private companies operating under similar conditions. Actually, it is more likely to depend on the current political temper of the country and on the results of doctrinaire propaganda from the partizans of both sides. Down to date most of the municipal plants in TVA territory seem to be making an excellent record, not only with respect to rates but also with respect to revenues. But the record is far from conclusive at this early date; and even the published data are not yet adequate for a reliable conclusion. Major Criticisms of the Government's Public Power Policies I hardly need remind you that, vigorously as the utility companies and their supporters have fought the President's policies with respect to the regulation of their business, their bitterest attacks have been reserved for the Administration's

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public power program. Mr. Abrams's book will give you an idea of the nature of their criticism. But you are likely to hear them uttered in the pending presidential campaign. All that I can do here is to comment briefly on some of the more plausible lines of attack. I leave for later discussion the one that seems to have the most general appeal—namely, that the Government's entry into the power business is an "entering wedge" for socialism. The charge of unfair and wasteful competition.—Those who make this charge state that the policy of the Government has been to engage in direct competition with the private companies by duplicating electric lines throughout city streets and country districts. In fact, however, no such policy has been adopted, since the waste involved in duplication of plants is well recognized. To be sure, threats to build duplicate plants have been made in some communities; for example, by the city of Knoxville, when the private company serving this city declined to sell its properties to the city at what the TVA regarded as a fair price. But the threat was not carried out, since the company at last reached an agreement to sell. The point has been made that the mere threat of competition may compel companies to sell their properties at unfairly low prices in order to avoid ruinous competition. Indeed, I believe this criticism to be valid and to call for a remedy. To be sure, I do not believe that the danger has materialized in the recent purchases actually made. Indeed, public agencies have been under strong inducement to offer liberal compensation in order to avoid the expenses and delay of a drawn-out battle. Nevertheless, good sportsmanship demands that companies which fail to reach a friendly agreement on sale price should have leave to appeal the issue to a fair-minded tribunal or board of arbitrators. Unless they decline such an opportunity, the power to threaten competition should not be exercised. The charge of dishonest yardsticks.—One of the country-

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wide advantages that have been claimed for the T V A and the other public power projects is that the retail rates of the public distribution plants would constitute standards of performance, or "yardsticks," by which to test the reasonableness of rates charged for similar service by private companies. In Chapter I I I called attention to this "yardstick" idea as looking toward the "competitive" or "comparative rate" standard and away from the "cost plus" standard of rate making. The private utility companies, however, have insisted that the rates charged in T V A territory and elsewhere cannot possibly qualify as fair yardsticks of private performance. They are alleged to be dishonest yardsticks because they fail to embody all the costs incurred by the Government in performing the service, to say nothing of the costs imposed on private companies in doing a similar business. For example, the T V A has allocated only part of the cost of its multiple-purpose dams as a power cost} whereas private companies (save in a few instances) must foot the entire bill of building a power dam. T h e T V A rates, moreover, do not cover taxes comparable to those of the private companies j they fail to include charges for franked postage; they take no account of the lower railroad rates paid by the Federal agency for the shipment of materials; they disregard certain promotional expenses assumed by T V A , but not charged to the public distribution plants; they make no allowance for interest comparable to that which private companies must pay for capital; and they omit still other costs, which I shall not take time to mention. In view of these facts, so the argument goes, private companies are called upon to run a race with a Government business that is largely subsidized by the taxpayers; and such a race is not a fair test of relative economic efficiency. Moreover, it is not cricket. For reasons beyond the scope of this short lecture some of

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the counts in this indictment do not seem to me well founded. But other counts have never received satisfactory answer. And if the T V A had not itself modified greatly its earlier position on yardstick rates, I should consider the charge a serious one against the Government's power program. In fact, however, the directors of the T V A have gained much from their experience with the problem and have profited from criticism which they received not only from their conservative enemies but also from their liberal friends. As to the element of generated-power cost, which is seriously affected by the problem of joint-cost allocation, the Authority makes no claim that such costs set a standard for private performance. T h e wholesale rates, however, are believed to be reasonable for purposes of broad comparison, because the private companies in that area have themselves asserted their ability to produce power at even lower costs. As to the retail rates, they are recognized as comparable only after due allowance is made for necessary cost differences. But the effort is being made to improve their comparability by the assumption of tax burdens equal to those of the private companies. In short, I am of the opinion that the Government agencies themselves have now recognized, though somewhat tardily, the just criticisms of the yardstick principle as first announced in an all-too-simple form. This is indeed an encouraging sign. It is fair to add that in actual practice private companies have not been compelled to charge unreasonably low rates under the pressure of a false yardstick. T o be sure, the T V A rates have stimulated some important rate reductions in neighboring areas. Indeed, the president of an electric company in far-off N e w England told me two years ago that the example of the T V A , with its remarkable record of stimulating increased demand at lower rates, was causing him to adopt a more vigorous policy of rate reductions. These indirect influences, however, are not those of yardstick rate making in any accurate sense;

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nor, so far as I know, have companies complained of their h a r m f u l effect. The charge of excess generating capacity.—Several years ago, this complaint was voiced loudly with respect to the T V A power projects. A l r e a d y , it was said, the territory had an adequate power supply; and the addition of more capacity was criminally wasteful. D o w n to date experience has belied this prediction, and the T V A now has a larger power market than it can supply with its present generation. M o r e capacity will be added later. But the T V A officials inform me that an inadequate demand for power is the least of their worries. U n d e r l o w rates the g r o w t h of demand has outrun even the most hopeful expectations. M o r e doubt on this point is justified in the case of some of the other projects, notably that at Grand Coulee. It may be, as the friends of this project expect, that an adequate load can be created without serious delay. But no one can fairly deny the optimistic nature of such a hope. O n e important fact, however, should be borne in mind in weighing the merits of the criticism now under review. T h e funds for these great water-power projects have been appropriated in a period of a prolonged business depression, when the Government was making every effort to provide useful work for idle men and idle resources. U n d e r such conditions the construction of public works of this nature, w e l l ahead of the expected need for their f u l l services, is sound economics. I n their private lives intelligent individuals adopt similar practices during slack times. A n d the rule applies equally forcibly to the economy of government. A l t h o u g h even today ten million men are said to be unemployed throughout the country, a different situation may soon arise as a result of the new program of national defense. A thorough reexamination of the unfinished water-power proj-

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ects, with special reference to the timing of their construction periods, is therefore in order. In some areas a slower pace may be desirable; in others, the increased demands of war industries for power may justify greater speed. But in any event the power capacity already available in the Tennessee area, at Bonneville, and elsewhere will become important instruments of national defense. A current news release from Washington, which came to my attention just after I had written the above paragraphs, is so directly to the point that it deserves mention here. It concerns a proposed Congressional appropriation of new funds to the T V A for the construction of another hydro-electric dam believed to be required by the new industrial program of national defense. This proposal is being resisted by some of the more stalwart enemies of the T V A on the ground that the Authority is "again" using national defense as a dishonest excuse to extend its wasteful, excess capacity. Speaking for the new National Defense Advisory Commission, Mr. Stettinius, Mr. Knudsen, and Mr. Gano Dunn have sharply criticized this attitude and have declared that even a short delay would be serious. Certainly no one who knows the standing and character of these eminent business men would attribute their action to undue prejudice in favor of public ownership. The charge that hydro-electric fower is obsolete.—Within recent years, the rapid progress in the technique of steam generation has strikingly reduced the amount of fuel required to produce a unit of electric energy, while water power has made no comparable gain in efficiency. As a result the spread between the cost of steam power and the cost of water power has diminished materially—so much so that the merits of any proposed new hydro-electric plant must be studied more closely today than was formerly deemed necessary. Such a study must be based on the facts of each special case, since every water-power

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project is, in many respects, unique as to cost and conditions of operation. Making the most of this well-recognized fact, the critics of the present Federal water-power program and of all public power projects have asserted that water power in general is obsolete. This sweeping assertion is not supported by competent, unprejudiced engineers j but it has the support of some distinguished engineers who share a profound distaste for public ownership. Criticisms of this nature have been leveled against every one of the recent Federal water-power projects as well as against the proposed St. Lawrence development. Since they raise technical engineering problems—although technical economic problems on which the engineers can speak only as laymen are also involved—I am not competent to form an independent judgment on their merits. But engineers in whose opinions I have confidence deny that they are valid with respect to most of the projects, while conceding their validity with respect to a small minority of them. One of the latter, Passamaquoddy, has been abandoned. Another, the Nebraska public power project, which has received heavy financial aid from the Federal Treasury, is criticized in its present engineering and economic aspects even by the more objective-minded friends of public ownership. A n y fair-minded attempt, however, to appraise these projects from an engineering standpoint is complicated by the uncertainty as to how much of the cost of the multiple-purpose dams should be charged to other services than that of power generation. It is further complicated by the fact, already referred to, that during times of business depression the money cost of these dams greatly overstates their real social costs. H e r e I must leave the question, since it is one that has never been answered to my own complete satisfaction. But the sweeping contention so frequently repeated by critics who themselves

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know nothing about the subject—that water power is outmoded —is clearly a mere weapon with which to fight the enemy. I must now say a few words about the third phase of the President's utility program—rural electrification. Rural

Electrification

Those of us who live in cities are likely to take for granted the availability of electric service to everyone. In fact, however, over 40 percent of the entire population lives in rural areas. And most of these areas are not supplied with power lines. In 1932 only 11 percent of all farms in the United States received electric service from central stations. The reasons for this situation are clear enough. On the one hand, the cost of building power lines and of supplying electric service in sparsely settled areas is relatively high per customer served. In the second place, farmers have a notoriously low cash income, which deters them from paying the high charges that a company must demand in order to furnish the service at cost plus an attractive profit. This situation led to a practice which was vicious despite the fact that the companies practicing it were hardly to be blamed— the practice of rural-area cream skimming. That is to say, the utility companies would extend their wires only along those lines of territory which gave promise of a profitable business. The menace of this practice was that the areas left unserved were of the skimmed-milk variety, which could not later be served by another agency except at inordinate expense. Since the best-paying territory had been preempted, its fat could not be mixed with the lean of the thinly settled areas. The problem of meeting these obstacles to rural electrification was brought to M r . Roosevelt's attention while he was still governor of the State of New York—a state which is largely rural, hard as it may be for us to realize this fact when we walk

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the sidewalks of New York. The problem was difficult, since it arose from a situation over which private utility managements, with all the good will in the world, had little control. Of course, one obvious and thoroughgoing solution suggested itself. The rural areas might be electrified on a grand scale, either by public agencies or by the existing private companies, under outright subsidies provided largely at the expense of city taxpayers— subsidies which would make good the difference between the high costs of rural service and the low revenues derivable from this service. Indeed, most authorities agree that only by heavy subsidies will it be possible to electrify substantially all farms under the present technique of distribution. But the obvious objections to any such scheme for vast subsidies led those specialists who recognized the benefits of rural electrification to consider other, less drastic measures of progress. The most important measure that was finally adopted was the organization of the Rural Electrification Administration. How does this agency work, and what have been its accomplishments? In the first place, it has tried in three ways to reduce the cost of rural electric service without resort to outright subsidy. First, it has made several hundred million dollars of Federal loans, either to rural cooperatives or to private utility companies, at low rates of interest. This aid has been of great importance, since a large part of the cost of supplying electricity is the cost of capital. Secondly, it has vigorously acted on the conviction, long held by a number of power engineers, such as Morris L . Cooke, that the rural construction technique of the private utility companies was unnecessarily costly. And, as a result of the experiments of its engineers, it has already materially reduced the per milage expense of rural construction. Thirdly, it has aided rural cooperatives in negotiating with private companies for the purchase of wholesale power at rates commensurate with modern generating costs; and this aid has sometimes taken the form of loans of money for independent

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Diesel generating plants when the charges demanded by the companies seem excessive. So much for activities of the Government in reducing operating and capital costs. In addition, the R E A , the T V A , and other Federal agencies have cooperated with agricultural colleges in the promotion of a demand for rural electric service through the development and advertising of the advantages of a " w e l l electrified" farm. In this work it has had splendid support from some of the private utility companies. T h e results of this program, down to date, are striking. In the five-year period since the R E A was created, early in 1 9 3 5 , the percentage of electrified farms was almost doubled, rising from 1 2 percent to 2 2 percent. But certain conflicts have arisen between the Administration and the private companies j and two of them require brief mention here. Recently the Rural Electrification Administrator has complained that several companies, anticipating plans to electrify a given area by means of a farm cooperative, have tried to defeat these plans by a hasty construction of "spite lines"—lines that invade the richer portions of the area without serving more than a small fraction of the territory. T h e companies accused of this practice have denied the charge vigorously. But the complaint comes from public officials of such high integrity that it cannot fairly be dismissed without better evidence than the corporate executives have yet brought forward. A far more important issue is that raised by the critics of the Washington program of rural electrification, who assert that it is not "economically sound" because the extensions of rural service have been made largely at the expense of the taxpayers. In short, the service has been subsidized. A n d this practice, vicious at its best, is all the worse because the major part of the subsidy has been camouflaged in the form of so-called loans rather than of outright gifts of the taxpayers' money. Most of these loans, it is alleged, are so poorly secured by any reason-

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ably prospective revenues that they will never be repaid. On the contrary, the rural cooperatives will face wholesale bankruptcy in a very few years. Only a few months ago this dire prediction was made to me by the rate expert of one of the great holding companies. As to its merits, I have no adequate data for an independent judgment, and I can only note that the forecast is sharply challenged by the officials of the Rural Electrification Administration. But even these officials concede that a material percentage of defaults is to be expected. They merely insist that the inevitable losses will be much more than repaid by the social gains of an improved standard of American farm life. Under these circumstances, the extent of the subsidy involved in the present program of rural electrification can only be guessed at for several years to come. But one point, which I have already referred to, is fairly obvious: namely, that unless the technique of electric distribution undergoes another revolution, nothing approaching a complete country-wide farm electrification will be possible without resort to outright subsidies of formidable size. And the question arises whether the nation would be justified in paying them in the interest of healthy farm life. The problem here presented is an economic problem of far more importance than electrification. It concerns the whole economics of subsidies, as contrasted with the philosophy of individualism which calls upon individuals to assume the full costs of services performed for their benefit. T o be sure, even most individualists recognize certain types of service as beyond the pale of their philosophy—notably, public education and, to some degree, public streets. But household and farm electrification, along with other utility services, is still generally ranked among those services for which the direct beneficiaries should pay in full. Many economists, I surmise, would take a middle ground,

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not denying the force of the argument for subsidies of such services as rural electrification, yet urging great caution in resorting to the practice. Their position of caution is based, not mainly on grounds of so5. +6 Credit collapse, danger of, 70 "Cut-throat competition," 7 Dam, hydro-electric, 49 Dams, multiple-purpose, 4 1 ; how much of cost should be charged to other services than power generation, 50 "Death Sentence," section of Holding Company Act, 36 Depression, water-power projects appropriated in period of, 48 Distribution systems, distinction between wholesale and retail, 3 2 ; Federal support of, 43 Driscoll, chairman, of Pennsylvania Commission, 36 Dunn, Gano, 49 Economic system, under philosophy of individualism, 5

Electric cooperatives, 43 Electricity, central-station, 39; charge of excess generating capacity, 4 8 ; increase in use of, 56 Electric light and power industry, 2 ; rate reductions, 18 (see also Rates)} reductions in operating costs, 19, 4 9 ; major activities of present Federal Government in field of, 3 o f f . ; Federal control of operating companies engaged in interstate commerce, 31 ff. j power transmitted across state lines, 3 1 ; problem complicated, 3 2 ; recent technological development, 3 2 ; distinction between wholesale and retail distribution business, 3 2 ; controlled by a dozen great systems, 36; Federal support of public distribution systems, 43 j charge of excess generating capacity, 48; reduced amount of fuel required to produce a unit of energy, 4 9 ; reliance on private competition as regulator conceded to be vain, 64; Canadian experience with government owned systems, 66 Engineering firms, support holding companies, 25 Engineers, overstep state boundaries, 32

England, national transmission system, 70 " F a i r value" doctrine, rate regulation under, 1 2 - 2 1 ; proclaimed by Supreme Court in case of Smyth vs. Ames, 1 j f . ; most obvious defect, 1 6 ; tendency to cripple effective public control, 1 7 ; may promote movement toward public ownership, 1 8 ; attempts to secure modification of, 33 ff. Farms, percentage receiving electric

I N service, J I , 5 3 ; complete country-wide electrification impossible without subsidies, 54 Federal bureaucracy, 33 Federal Government, see Government Federal Interstate Commerce Commission, 3 Federal Power Act of 1 9 3 J , 3 1 , 32 Federal Power Commission, 20, 3 1 , 3 3 j publication of "typical electric bills," 34; study of differential costs, 35 ; report on Comparative Rates of Publicly and Privately Otvned Electric Utilities, 66; data re public plants, 67 Federal utility laws, 33 Federal Water Power Act of 1920, 33

Ferguson, Samuel, 26 Ferry boats, 1 Financial crash, 29; initiated by toppling of Insull empire, 22, 25

Gas plants, 39 Generating capacity, charge of excess, 48 Golden Twenties, rise of holding companies, 22-27 Government, activities in reducing costs of rural electrification, 5 3 ; leadership in setting up area of public distribution systems in T V A territory, 4 3 ; opposition to interference by, 6; opposition to overcentralization of, 3 2 ; type of competition that led to demand for interference, 9 ; competition with private companies has not materialized, 57 Government Experimentation in Business (Persons), published under auspices of Edison Elcctric Institute, 65

Government ownership, see Public ownership Grand Coulee, 4 2 ; a multiplepurpose enterprise, 4 1 ; capacity and demand, 48 Grants-in-aid, Federal, 71 "Grid system," 70 Hartford Electric Light Company, 26 "Heavy industries," may be treated as public utilities, 64 Holding companies, 2 1 ; rise of, 2227 ; financial collapse, 23 ; defined, 2 3; used for profiteering, 24; losses to investors through, 26, 69 ; stocks of, led speculative market, 27; abolition of, favored, 36 Holding Company, The (by Bonbright and Means), 24 Holding Company Act of 1935, 35 f f . ; fought by utility companies, 1 1 Hoover, Herbert C., 27, 62; favored public ownership of water power as applied to Colorado River, 41 Hughes, Charles Evans, TO Hydro-electric companies, regulation °f> 3 3

Hydro-electric dam, 49 Hydro-electric power, charge thit it is obsolete, 49 ff. Hydro-Electric Power Commission of Ontario, 20, 33, 40, 58, 66, 69 Inconsistency inevitable in early stages of reform program, 30 Individualism, best economic system under philosophy of, j ; much of charm attached to, disappeared, 64 Insull system, crash of, 22, 25 Interstate Commerce Act, 9, 1 3 Interstate Commerce Commission, 3 1 Interstate electric transmission, 28

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Investors, protection of, against financial mismanagement, 10, 70; most immediate victims of holding companies, 2 6 ; liberal treatment of, favored, 72 Jamestown, N . Y . , lower-rate range of municipal electric plant, 20 Justice, Department of, suit against Aluminum Company, g Knoxvillc, Tcnn., distributing system, 4 3 ; threat to build duplicate plant, +5 Knudsen, Commissioner, 49 Lippmann, Walter, 65 Loans, Federal, 71 Local utilities, danger of conflict between state and Federal agencies, 31

Natural monopoly, 5, 7, 8 Nebraska public power project, 50 New Deal, charged with inconsistency, 29; hope of discrediting program, 6 1 ; see also Roosevelt, F . D. New York State Public Service Commission, 3 Niagara-Hudson Power Corporation, 27 Norris, Senator, 42 Ontario Hydro-Electric system, 33, 40, 58, 66, 69; lower-rate range of municipal plants, 20 Operating expenses, excessive rates supported by extravagant charges to, 64 Passamaquoddy, 50 Pennsylvania Railroad, competition, 8

Means, Gardiner C., 24 Monopolies, semiprivate, 64 Monopoly, makes regulation necessary, 5 ; natural monopoly, 5, 7, 8; monopoly features of private industry, 7 ; threat to present economic order of, 64 Monsanto Chemical Company, 43 Municipal plants, see Public ownership N R A Codes, "administered prices" under, 30 National Association of Railroad and Utility Commissioners, 3 3 National defense, possible effect upon unemployment, 4 8 ; power an important instrument in, 49 National Defense Advisory Commission, 49 National power policy and public ownership, 6 1 - 7 2

Persons, Warren H., 65 Postoffice business, a Governmentowned utility, 39 Potomac Electric Company, sidestepped " f a i r value" doctrine, 21 Power, policies of Roosevelt administration, 28-38; an important instrument of national defense, 49 ; industry sounder than in 1929, 56 j national policy and public ownership, 6 1 - 7 2 ; unregulated private ownership outlawed, 64 ; participation of state and Federal governments in integration of, 70; see also Electric light and power industry ; Hydro-electric power; Water power Power in Transition (Abrams), 42 Price fixing, criteria of, 1 3 ; New Deal charged with, 29 Prices, competition as a regulator of, «3

I N Private industry, competitive features, 7 Privately owned utilities, e n j o y a partial natural monopoly, 8 ; tendency to give commissions more control over, 9 ; regulation recognized as alternative to public ownership, 1 1 ; inefficiency of some of largest operating companies, i 5 ; rates of electric companies, 2 0 ; development of utility systems by device of holding companies, 24 {see also H o l d i n g companies) j flaws in regulation, 2 8 ; can coexist with public plants, 3 0 ; proposals to cure defects in regulated, 3 0 ; political p o w e r , 3 6 ; bitterest attacks reserved f o r A d ministration's public p o w e r p r o g r a m , 4 4 ¡ not under pressure of false yardstick, 4 7 ; Federal loans to, 5 2 j issue between outright public ownership and, 61 ; threatened with inability to secure equity capital, 62 ; decisions of management subject to dictation or veto power, 64 j Federal and state incursions into, 65 ; industrial p o w e r l a r g e l y monopolized by, 66 ; discrepancies between high-rate and low-rate areas, 6 7 ; have suffered little through rate reduction, 68 Profit motive and competition, 6 ; as drive to accomplishment, 6 3 ; dominate economic order, 65 f. "Properties dedicated to a public use," i Protective tariffs, opposed by true conservatives, 63 "Prudent investment" principle, 3 3 , 34 Public distribution plants in E n g land, 58 Public opinion, demand f o r protec-

E. A

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tion against abuses of private monopoly, 7 Public ownership, rate reductions of municipal plants, 20, 6 6 ; downw a r d trend of rates quickened by threat o f , 2 1 , 56, 67, 6 8 ; proposals to adopt some f o r m o f , 3 0 ; private and public plants can coexist, 3 0 ; and rural electrification, 3 9 - 5 5 i of street railways, 3 9 ; public power programs, 4 0 - 4 4 ; national water-power p r o g r a m , 4 1 ; Federal support of public distribution systems, 4 3 ; m a j o r criticisms of Government's power policies, 4 4 - 5 1 ; local, 4 4 ; " m e n a c e " o f , 57 ff.; experimental attitude toward, 5 7 ; not entering wedge f o r socialism, 5 9 ; and the national p o w e r policy, 6 1 - 7 2 ; issue between restricted private and, 6 1 ; fallacious point of v i e w , 6 3 ; past experience with, 6 5 ; plants owned by localities more than selfsustaining, 6 6 ; contributions of municipal plants to cities, 6 7 ; discrepancies between high-rate and low-rate areas, 6 7 ; public power projects responsible f o r private rate reductions, 6 8 ; quality of service: financial management, 6 9 ; extensions of projects justified, 69 Public Ownership L e a g u e , 39 Public Service Commission L a w , attacked by utility l a w y e r s , 1 0 Public service commissions, public utilities under regulation by, 2 ; purpose: powers, 3 ; tendency of legislatures to increase control o f , over private industry, 9 ; g r o w t h of powers, 1 0 ; authority to set rates: problems faced, 1 2 , 13; "cost p l u s " test in deciding rate cases, 1 4 ; failure to accomplish

8o

I N D E X

Public service commissions ( C o n / . ) adequate rate reductions, 2 0 ; restrictions on their powers, 28 Public use, properties dedicated to, 1 Public utilities, control o f , as current economic problem, 1 - 1 1 ; types of industry covered, 2 ; regulation, 3 - 4 ; privileges, 3, 5 ; obligations, 3 ; reasons f o r regulation, 4-9 j monopolistic status, 5, 7 ; competition, 8 ; accounts, 1 0 , 34, 57 j legal duty to serve at reasonable rates, 1 2 ; rate of profit limited by public service laws, 27 ; Federal utility laws, 3 3 ; are Government agencies, 59 j conversion o f , into wholesalers of hydro p o w e r to private companies suggested, 6 2 ; no hope of taking out of politics, 6 4 ; better under socialized ownership or regulated private ownership, 6 5 ; w a r f a r e against programs of public ownership, 7 1 f. Public utility problem, as a m a j o r political issue, 1 f., 29 ; suggestions f o r further reading, 60 Public-utility rate making, 1 4 Public water-power projects, national assets in conjunction with private plants, 56 Quality, competition as a regulator, 63 Railroads, 1 , 8 ; early history of regulation, 9 ; regulation of intrastate traffic o f , 3 1 Rates, extensions of commission authority as prerequisite f o r regulation of, 1 0 ; regulation o f , under " f a i r v a l u e " doctrine, 1 2 - 2 1 ; criteria for level o f , 1 3 , 7 0 ; downw a r d trend quickened by threat of public ownership, 2 1 , 56, 6 7 ; in

holding-company areas, 2 6 ; control, 33 ff.; publication of comparisons, 34; discrepancies in rates charged by private and public plants, 3 4 ; use of water-power projects as means of influencing, 4 2 ; industrial, higher f o r municipal plants, 6 6 ; comparisons of private with public, 6 7 ; limit to possibility of reductions, 68 Regional planning and regulating commissions, 32 R e g u l a t i n g agencies, powers of, 10, 32 Regulation, government, 3 ; reasons for, 4 ; problems changed by partial competition, 9 ; not limited to setting of rates and of service standards, 9 - 1 1 ; of rates under " f a i r v a l u e " doctrine, 1 2 - 2 1 ; of public utilities, 2 8 ; measures designed to make, more effective, 30, 3 1 - 3 8 , 69 Republican P a r t y , origin of present Federal water-power policy credited or debited to, 4 1 Resale-price maintenance acts opposed by conservatives, 63 f. R i v e r improvement, water power developed in conjunction with other functions o f , 4 1 Roosevelt, F r a n k l i n D . , raised electric p o w e r problem to rank of m a j o r political issue, 2 ; "public yardstick" principle of rate making, 1 4 , 40, 4 2 , 45 i f . ; power policies, 2 2 , 2 8 - 3 8 , 4 0 - 5 1 ; origin of interest in public utilities, 2 9 ; criticism of " f a i r v a l u e " rule, 3 3 ; p o w e r p r o g r a m must await test of riper experience, 56 R u r a l cooperatives, Federal loans to, 52 R u r a l electrification, 3 0 , 5 1 ff.; and

INDEX public ownership, 39-555 expense of construction reduced, 5 2 ; issue raised by critics of, 53 Rural Electrification Administration, 5 1 , 57} cooperation with agricultural colleges in promotion of demand for rural electric service, 5 3

St. Lawrence River, proposed grant of power to utility interests, 29 ; development, 4 2 ; criticisms leveled against development, 50 Seattle, lower-rate range of municipal electric plant, 20 Securities and Exchange Commission, Holding Company Act administered by, 36 ff. ; belief that it should have less administrative discretion, 38 Security issues, necessity for supervision, 10 Service, competition as a regulator of, 63 Smyth v. Ames, 16 Smith, Adam, 6 Social control, opposition to, 6 Socialism, public service commissions opposed as measures of, 10 ; "entering wedge" for, 45, 5 7 ; movements for, have sources in breakdown of social-economic system, S» "Spite lines," 53 Standard Gas & Electric Company, Standard Oil Company, early practices foster unjust discrimination, 9 State public service commissions, lack authority to set rates for power transmitted across state lines, 31 States' rights, 32, 33 Steam power, spread between cost of,

8l

and cost of water power diminished, 49 Steel industry, may be treated as public utility, 64 Stettinius, commissioner, 49 Stock-market boom of 1920's, holding company became instrument of high finance during, 24 Stock-market crash of 1929, 22, 25, 29

Street railways, competition ruinously keen, 9 ; public ownership of, 39 Subsidiaries, management of, 23 Subsidies, economics of, 54 Supreme Court of the United States, impractical system of determining fair profits imposed by, 1 5 ; asked to reconsider " f a i r value," 3 3 ; President's recent appointments to, 34 Symbols of Government (Arnold), 27 T V A , lower-rate range of municipal electric plants in territory, 20; a multiple-purpose enterprise, 4 1 ; President's most outstanding accomplishment, 4 2 ; does not supply retail electric service, 43 ; control over rate policies, 4 4 ; record of municipal plants in territory, 4 4 ; yardstick rate making, 46, 7 1 ; rates stimulate rate reductions in neighboring areas, 4 7 ; has larger power market than it can supply, 4 8 ; power capacity available, 4 9 ; proposed appropriation of funds to, for construction of hydroelectric dam, 4 9 ; cooperation with agricultural colleges in promotion of rural electric service, 5 3 ¡ case may become a popular "cause," 72

82

INDEX

Tacoma, lower-rate range of municipal electric plant, 20 Taxation, of Government-owned plants, 71 Telephone business, controversy over rates in New York and Illinois, 1 7 ; unregulated private ownership outlawed, 64 Tennessee, distributing systems, 43 Thomas, Norman, 65 T o l l roads and bridges, 1 "Typical electric bills," show discrepancies in rates charged by private and public plants, 34

Unemployment, possible effect of national defense upon, 48 Unemployment relief, pressure to plan public works for, 4 1 , 4 8 ; construction of water-power projects as measure of, 4 2 ; Government grants-in-aid, 44 United States Steel Corporation, a holding company, 23 Utilities, see Public utilities Utility holding companies, see Holding companies

Washington, D.C., rate reductions marked by proposal for Federal power plant on Potomac, 68 Water power, advantages of public over private ownership, 4 1 ; Federal agencies that administer plants, 4 3 ; spread between cost of, and cost of steam power diminished, 4 9 ; not obsolete, 50; see also Power Water-power program, national, 4 . ff. Water-power projects, construction of, as a measure of unemployment relief, 4 2 ; funds for, appropriated in period of business depression, 4 8 ; reexamination of unfinished, in order, 48 f . ; Federal, criticisms leveled against, j o Water-supply systems, run as municipal departments, 39 Wealth of Nations (Adam Smith), 6 Willkie, Wendell L., 2, 70 "Yardstick" principle of rate making, 14, 40, 4 2 ; charge of dishonest, 45 i f . ; reexamination of theory and practice of, needed, 71