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Author:
Title:
Service at cost for street
railways
Place:
New Yorl<
Date:
[1921]
^i'g>2^09-/l
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Service at cost for street railways,
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( Columbia Wlnihtxiitp
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LIBRARY
d^tliool Of ^nuintM
of
9camntamp
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1 1
SUPPLEMENT TO THE
National
Muaicipal
Review
Vol. X, No. 2
February, 1921
SERVICE AT COST
FOR
STREET RAILWAYS
A SYMPOSIUM
I
Four Papers by Experienced Public Officials
Answering the Question, "Is Service-at-Cost
a Panacea or Nostrum?**
PUBUSHED BY THE
NATIONAL MUNICIPAL LEAGUE
RAILROAD SQUARE, CONCORD, N. H.
EDITORIAL OFFICE, 261 BROADWAY,
NEW YORK, N. Y.
Watered as second-cUu matter April 15, 1914, at the post-office at Concord, New Hampshire, under the Act of Aocust 14,
ItU
I s''a Inir m
\
SERVICE-AT-COST-PANACEA OR NOSTRUM?
CONTENTS
^ Ill
Railway Co,
126
134
Service at Cost Versv. ^x^^pal 0™ship ..^.^.^^^^^^^^
Charles M. Fassett, Former Mayor oj bpomne, i^luj,
American City Consultants.
»«—
BOSTON— THE PUBLIC TRUSTEE PLAN
BY JAMES F. JACKSON
Chairman, Board of Trustees, Boston Elevated Railtoay
Chapter 159 of the acts of the legis-
lature of Massachusetts of 1918, known
as the Public Control Act, went into
effect on the first day of July in that
year. It arranged what is practically
a lease of the Boston Elevated Railway
for the term of ten years to the state
of Massachusetts representing for that
purpose Boston and certain suburban
cities and towns which the railway
serves. Five trustees to be appointed
by the governor of the state and to
hold office for the ten years of the lease
were given absolute control over the
management and operation of the rail-
way. The rental was to be paid in
fixed dividends upon outstanding stock
at 5 per cent for the first two years, at
5^ per cent for the next two years and
at 6 per cent for the balance of the
term.
This act grew out of the vain strug-
gle under private management to fur-
nish service upon a five-cent fare, a
struggle that even under pre-war prices
and conditions had grown more and
more desperate until the payment of
dividends was suspended and the effort
to maintain the property practically
abandoned. The problem was no
longer a question of profits for stock-
holders but of the existence of the serv-
ice upon a system prostrated by lack
of capital and revenue.
The legislature could have met the
situation in any one of four ways. It
could have allowed the railway to go
into the hands of a receiver with the
consequent expense, delay and uncer-
tainties; or it could come to the aid of
private management with relief from
burdens and with guarantee of credit;
111
or it could commit itself completely to
the theory of pubUc ownership; or it
could take the less radical step of an
e3q>eriment with pubUc control of the
railway under temporary lease from
its owners. It chose the last of these
courses.
WHY THE TRUSTEE PLAN WAS
ADOPTED
Three factors in the situation un-
doubtedly had influence in bringing
about this decision.
The first was the fact that the use-
fulness of the street railway had come
to be fully understood. It was appre-
ciated as never before that the street
car is not alone the poor man's carriage
but that of the pubhc official, the man
of business, the professional man-
directly or indirectly the carriage on
which everyone rehes and for which
no jitney or other kind of electric om-
nibus can be substituted. It must be
preserved.
The second was the fact that this
metropoUtan railway represented an
honest investment under a pubHe
supervision that had prevented exces-
sive issue of stock or bonds and that,
therefore, there was no call for reor-
ganization to ehminate watered stock.
The third was the fact that the new
capital which was indispensable to
sustain this service must be obtained
by buying it at market prices as other
necessities are bought, in other words
that investment must have its secure
return.
To the legislative mind the problem
for experience to solve was whether or
NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb.
1921]
112
not a public management coidd be
efficient, that is conducted without
waste and without loss of ambition or
pride in achievement. It was thought
that a trial was worth while.
The basic plan for this experiment
was that which I believe is the best for
any street railway enterprise— a serv-
ice at cost— meaning of course proper
or necessary cost.
In assuming their duties the trustees
took over a railway that covered
535.326 miles of track, 475.717 miles of
it surface track, 30.080 miles in sub-
ways and 29.529 miles upon elevated
structure. Much of the surface track
was of hght construction and badly
worn, a large part of the roUing stock
in poor repair and of obsolete type.
The power plant was in process of
development and repair shops and car
bams utterly inadequate. The total
investment in this railway system was
$93,612,211.21 represented by out-
standing stock and bonds in about
equal proportion. The aggregate cost
of the subways and tunnels under lease
to this company was $35,033,506.11.
The Cambridge subway was then in-
cluded in the corporate property at its
cost of $7,868,000 but last winter this
subway was transferred to the state
practically at cost and leased to the
company as the other subways had
been leased at construction.
MORE REVENUE NEEDED
The act directed the trustees to rein-
state the railway in good operating
condition. To do this additional cap-
ital and additional revenue must be
immediately obtained. As a measure
for providing a first installment of the
needed capital the act authorized an
issue of preferred stock to the amount
of $2,000,000. To secure operatmg
revenue the act directed the trustees to
put in force fares that would make the
service self-supporting and provided
that meanwhile deficits incurred should
be met from taxation in the cities and
towns served by the railway, the
amounts so advanced to be repaid
whenever operating revenue should
exceed operating cost.
The new capital was inmiediately
used in part payment for 250 modern
cars. Successive advances in fare fol-
lowed. A seven-cent fare was put in
effect in August and in October gave
way to an eight-cent fare which after
a trial of seven months also proved in-
adequate. At the close of the year
ending on June 30, 1919, receipts had
failed to meet expenses by approxi-
mately five miUion dollars which
amount was raised by taxation in the
cities and towns served.
The ten-cent fare now in force was
introduced in July, 1919. Losses under
it continued in decreasing amount for
two months, but in September this fare
began to produce revenue sufficient to
meet expenses and eventually to absorb
the earlier deficits so that on June 30,
1920, the trustees were able to report
that operating receipts for the year had
met operating costs including all fixed
charges and a reserve to depreciation.
In summer months the expense for
street work is always large and receipts
are always smaller than in other
months, traffic falUng below average.
These conditions prevailed as usual in
July, August and September of this
year. The expected operating deficit
for those months was realized but
unless some extraordinary event inter-
venes this will be readily absorbed
before next July leaving at the close of
this year as at the end of last year no
deficit.
There is a natural interest about tne
effect of higher fares upon traffic. Our
experience has shown that there has
been a gain in total revenue but a loss
in the number of passengers carried.
BOSTON— THE PUBLIC TRUSTEE PLAN
113
Under the ten-cent fare this loss at
first amounted to 12 per cent of the
traffic but gradually diminished to 10
per cent. To use figures the number
of passengers carried under a five-cent
fare for the month of October, 1917,
was 32,854,047. Under the ten-cent
fare in October, 1920, the number was
29,382,315.
Had there been during this time no
unusually large increase in operating
costs over those prevailing in the days
of private management, receipts would
have met expenditures at a fare con-
siderably below ten cents. As every-
one knows, however, prices had risen
upon every hand at a tremendous pace.
This was featured most strikingly
through advances in wages. The av-
erage number of employes upon this
railway is 10,000. In the spring of
1918 an advance in wages took place
the effect of which was felt throughout
the first year of public control. In that
year a further advance took place and
last year a third. The aggregate in-
crease in operating cost on this account
has been approximately $7,000,000.
To-day more than half of every fare
goes to compensation of employes.
The higher cost of coal has been an-
other leading feature of increases in
operating cost. Owing to a favorable
contract that expired last July this
advance has been seriously felt by us
only during the last four months. As
our yearly consumption of coal ap-
proximates 300,000 tons the additional
expense this year would reach at pres-
ent rates $2,000,000.
One item of expenditure is a reserve
to depreciation amounting to $2,000,-
000. This is annually set aside from
fares to provide for renewals and re-
placements. Proper charges to depre-
ciation are made not to build up the
property to the full measure of original
investment for the benefit of stockhold-
ers, but to maintain it in good operating
condition for the benefit of the public.
This means that the old-fashioned
notion of maintaining a railway by
hand to mouth methods with large ex-
penditures in prosperous years and
small expenditures or none at all in the
lean years is a thing of the past. Sound
policy to-day takes care that out of
every day's receipts something is put
aside to meet the wear and tear that is
constantly taking place. The lack of
this precaution accounts in large part
for the disasters which have over-
taken so many street railway enter-
prises.
ZONE FARES OR FLAT RATE?
Boston has a single flat fare. It is a
tradition and also the profound belief
of many that this distributes the pop-
ulation, attracting people from con-
gested centers into the outlying sub-
urbs and that in so doing it establishes
more healthful living conditions.
Many families have undoubtedly es-
tablished their homes in these suburbs
in the confident belief that this single
flat fare would never be disturbed.
But there are in Boston enthusiastic
advocates of zone fares as more equi-
table and just in making the cost of
riding proportionate to some extent
with the distance the passenger is
carried. The trustees are studying the
comparative merits of the two systems
in the light of experience in this and
other countries.
Experiments have been recently
made with a five-cent fare upon lines
where the run is short and where prac-
tically no competition with the general
ten-cent fare is involved. Some of
these experiments have proved failures
but two of the Unes are now in success-
ful operation.
Nothing is more idle than an attempt
to compare street railway service in
one city with that in another without
NATIONAL MUNICIPAL BEVIEW SUPPLEMENT [Feb.
1921]
BOSTON— THE PUBLIC TRUSTEE PLAN
115
l|
114
the knowledge that is nec^sary to en-
able one to make proper "^Ho^f ^^«^
distinguishing condition that make
the seWice dissimilar. The^ diffmng
conditions vitally affect both the kind
and the cost of transportation, lake
a look at the situation m B<»ton. Ihe
center of business is confined to a
small area into and from which on an
average forty to fifty thousand peopte
daily ride upon.the street cars at about
the same hour in the moniing and at
night. The problem of furmshmg
proper accommodation is one that is
diflScult. We have here a transporta-
tion wheel with a hub becoming more
and more inadequate to receive the
spokes which enter it as the terminal
Eradiating lines. S*"** ^"^^^^ J^^i
long ago inadequate for general travel
and the street cars were dnven mto
subways. The first subway bu.lt m
this country was built in Boston The
cost of constructing and mainta,ining
these subways is borne under easting
law by the car rider in rentals paid from
fares into the public treasury. The
i.vartion of this tax now means an
^rSpayment of nearly $2,000 000
or one-half of a cent upon each nde.
This is a relic from days when tolls
were exacted for the use of highways^
^e street car is a P«bbc conv^anoe
operated in Boston by P"bl'« .o^^'^;^
aid the subway is a public highway.
The automobilist uses highways spe-
ciaUy adapted at great cost to his con-
vince Vithout contribution from
him to construction expense. What
excuse is there for this discrimination
in his favor and against the car r,d«?
The investment in the Boston ele-
vated system, including subways and
I^elsf is $136,500,000. The average
ride over this system is four and one
S miles while the longest di^^-^
covered is nineteen miles. The aver
age number of passengers earned dai y
in 1918 was 955.245; the average m
1919 was 889.750. The »v^'^8\^^^ .
October of this year was 947.816 Ihe
budget of expenditures for 1919 was
$32,000,000. The budget for this year
is $34,000,000.
Up^n .Assuming office the trustees
immediately worked out a general plan
of improvement involving a total out-
lay during a period of five years of
about eighteen million dollars charge-
able in about equal P^Pof f "^ ,.*"
capital and replacement. Substantial
progress has been made toward the
consummation of this program bnnging
with it modem cars, improved traxjk,
larger accommodation and more fre-
quent service. . ,„n,„
The trustees make no claim as to the
success of the experiment m pubhc
control which is in their charge. One
reason for saying little or nothing about
what has been done is the ever present
knowledge on their part that whatever
it may be it is only a step toward the
goal which they hope the service will
finally reach. . .
The board is organized with chair-
man and recording secretary, the
former assuming the ^l^ties %dinari y
performed by the president of a rail,
way and the latter those ordinarily
performed by the clerk of a board of
dkectors. Committees of two are
assigned to administrative depart-
3 and report from their severa
spheres of activity at the stated or
special meetings of the board. The
t^tees in this way are keeping m close
touch with all matters of administra-
tion The operating staff has at its
head our general manager, Edward
Dana, who was appointed to that posi-
tion in recognition of his fitness for its
Jes^LibiUtlTs. The confidence re^
posed in him has been amply justified
in what he has accomphshed, and his
abiUty, energy and untiring devoUon
to the work and his harmomous rela-
tions with the trustees and with sub-
ordinate oflGlcials and employes have
proved invaluable.
GUIDING PRINCIPLES OF ADMINISTRA-
TION
There are certain principles of ad-
ministration that the trustees have
adopted to which I will briefly refer.
Roosevelt, as we know, was fond of
referring to the square deal. K men
would oftener take the trouble to get
below the surface of life they would
find that there is something in every
one that responds to the call for it, for
even handed justice. It is the saving
grace in the world. But we can be sure
that no such thing is possible where
ignorance rules instead of knowledge.
Every effort then should be made to
give out the truth, the whole truth and
nothing but the truth with respect to
all matters that are of interest to the
travelling public.
Nothing hinders the approach of rail-
way service to the standard which it
ought to reach so much as the lack of
patience. We all fail to exercise it.
We jump to conclusions without know-
ing the facts; we hand in our verdict
without waiting for the evidence.
How can we secure patience on the
part of the public? In only one way,
by publication of facts. Plain and
complete and frequent information
makes for the sound public opinion
which is the safeguard of manage-
ment.
Street transportation must always
be subject to unavoidable interruption.
A car loaded with passengers anxious
to reach office or home stops, and an-
other car stops, and another, and an-
other until the Une is choked with cars
carrying hundreds of impatient men
and women. The use of every effort
to let the crews and the passengers
know perhaps that a truck has fallen
across the track, or that a drawbridge
is up, or that a rail is broken, or some-
thing wrong with the p>ower is worth
the cost at almost any price. With the
information conductors can cope with
the emergency and passengers will be
as patient as we can fairly ask.
Financial interests are entitled to
know the whole truth. Credit cannot
live without frank information. If this
is given credit will follow as far as it
ought to follow.
Close relations should be established
between management and employes.
Acquaintance on the part of the men
with receipts and expenditures with
the reason for existing conditions and
plans for their improvement and op-
portunity to make suggestion about
them will tend to lessen indifference,
create mutual confidence and awaken
ambition and pride in work.
Street car service for the most part
is a personal undertaking. Its standing
in the community depends chiefly upon
the men who operate the cars. Direct-
ors or trustees or general managers
may be wise in their day and genera-
tion and yet if their wisdom fails to
estabUsh team work with their em-
ployes it will be of little avail.
Co-operation between the public and
employes is vital to success. Both
must contribute to it. Bad work by
the employe is quickly condemned.
Why not commend good work? The
automobile is the carriage of the indi-
vidual. The car is the carriage of a
group of individuals, practically their
automobile. If your chauffeur shows
skill you compUment him. Why not
say a word in commendation to motor-
man or conductor who does good
work?
Everyone knows the difference be-
tween the motorman whose skill makes
the journey safe and agreeable and the
motorman who stops and starts his
car in a way that throws his passen-
gers about or drives it at a pace that is
NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb.
1921] INDIANAPOLIS RETAINS THE FIVE-CENT FARE
117
■II
>
116
disagreeable if not dangerous. Every-
one appreciates the conductor who is
alert, helpful and pleasant Why
should passengers refuse to heed the
request he makes of them in their own
interest and that of all who nde?
I have a last personal word. 1 have
long been acquainted with the men who
have had charge of the railways in
Massachusetts and in New Englajid.
They have been men who are held in
the highest esteem in the commumties
where they live. Through the stress of
all these years they have kept at their
posts undismayed. The record is one
of ability, loyalty to pubUc interests
and unblemished honor. Nor are they
unUke the men who have managed
street railways elsewhere.
Under the conditions which prevail
to-day we may all of us feel a new zeal,
a new confidence in the success of the
work at which they have labored so
long. My last word then is one of
optimism. But the struggle is not over.
Fares are not yet adjusted. There is
the fight against the jitney and the
contest with the private automobile;
the search for new economies to meet
higher costs of operation; the effort to
restore credit and inspire new conh-
dence in capital. So it is an up grade
and a long pull that lies ahead, but
the street car is bound to win.
INDIANAPOLIS RETAINS THE FIVE
CENT FARE^
BUT REJECTS SERVICE-AT-COST
BY E. I.
ChaxTman, PuUic Service
Your convention meets in Indian-
apohs, a community that believes m a
five-cent street carfare. It hopes to
retain it.
Those of you who have come from
Portland, Maine, and Portland, Ore-
gon, from New Orleans and the Twin
Cities, and from cities between, may
experience in IndianapoUs the pleasant
reminiscence of the good old days of
1 Editor's Note: At the time of the National
Municipal League meeting in Indianapolis, there
was pending before the Indiana Commission, as
commented on by Mr. Ix^wis in his addr^, a
petition of the Indianapolb Street Ra Jway Com-
Uny for a two cent transfer charge. This petition
^ acted upon December 18. 1920 and a one
cent transfer charge was granted, the five cent
basicfarebeingretained. The question of retain-
ing or increasing this charge in the future will be
a^wered in accordance with the anticipa^
changed conditions affecting both costs and rev-
enue toing Wh as their effecU are discerned.
LEWIS
Commission of Indiana
five-cent street car rides. With the
desertion of Cleveland, the list of
places where the all but forgotten
sensation of buying a street car ride
with one coin— unless it be a ten-cent
piece— is approaching the point of near
extinction. « , j *u«
Delegates from Portland on the
Atlantic Coast paid a ten-cent street
carfare to get to the raibroad station.
K they stopped at any cities enroute,
except New York whose five-cent fares
are causing heavy deficits that cannot
continue, they have paid seven, eight
or ten cents for street car rides. In
Boston it was ten cents, in Providence
six in Albany seven, in Buffalo seven,
in Newark seven, in Philadelphia seven,
in Baltimore seven, in Washington
eight, in Pittsburgh ten, in Cleveland
six in Detroit six, in Toledo seven, m
Columbus six, in Cincinnati eight
cents.
Those coming from Portland on the
Pacific Coast paid eight cents to get
to their station. If they stopped off
enroute they paid a ten cent fare in
Seattle, in Tacoma ten cents, in Spo-
kane six, in San Francisco five, in Los
Angeles five, in Salt Lake seven, in
Denver six, in Topeka eight, in Omaha
seven, in St. Paul six, in MinneapoUs
six, in New Orleans eight, in Louisville
five, in Kansas City eight, in St. Louis
seven, in Milwaukee seven, in Chicago
eight cents.
On July 1, 1920, I do not have the
numerous changes upward since that
date, if you had stopped off for a street
car ride in any one of 69 municipalities,
including such cities as Boston, Pitts-
burgh and Seattle, you would have paid
ten cents for a street car ride; if in any
one of 32 cities, eight or nine cents; if
in any one of 178 cities, seven cents; if
in any one of 176 cities, six cents; and,
generally, there would have been extra
charge for transfer or for continuation
of ride from one zone into another
zone. To-day 600 cities have street
car cash fares in excess of five cents.
While discovery of a place where one
can actually buy 18 miles of riding for
five cents is notable, it is not as re-
markable as the discovery that the
company is solvent and full of hope.
Returning confidence in its future is
indicated by higher bid prices for its
securities.
On July 1, 1920, there were 118
companies, with a total of 7,820 miles
of track in receivership. Since July
1 there have been a number of receiver-
ships added to this depressing total.
Other companies, some of which have
exhausted possibilities of eight- and
ten-cent fares, are showing hopeless
tendencies. Fifty-six of those 118
receiverships occurred between June
1, 1919, and July 1, 1920.. Obviously
the departure from the five-cent fare
has not been a complete success. As
an institution the street railroad has
the pallor of bankruptcy.
A great deal of attention has been
directed to rehabihtation, or one might
say resuscitation, of the national sys-
tem of steam railway transportation.
Our congress has given its best efforts
to that solution. Important as is the
problem of the steam railroads, the fact
remains that while they transport
approximately one billion persons
annually, the street railways transport
fourteen or fiif teen persons to every one
carried by the steam roads.
The day is past when financial
distress of the street railway industry
could be looked on as being only of
concern to the industry. The growth
of cities is, as never before, insistently
demanding money for extensions. The
fact that the voice calling for that
money generally does not inspire con-
fidence constitutes one of our most
important municipal problems.
THE company's ATTITUDE TO THE
FIVE-CENT FARE
When I was invited to appear on
your programme it was to speak on
"The Success of the five-cent fare in
Indianapolis." I suggested change of
title to "The Five-Cent Fare in
Indianapolis." That does not imply
that the five-cent fare has not been a
success, but I believe that no one should
speak of accomplished success until the
war's readjustment period is past.
We hope, and there seems to be good
reason to expect, that two or three
years from this time IndianapoHs»
when called on at one of your meetings,
can respond to the toast "IndianapoHs,
the Five-Cent Street Carfare City."
I proceeded after making the change
in title to block out what I would say.
Since then, however, a changed condi-
118
NATIONAL MUNICffAL BEVmW SUPPLEMENT IP*.
II
tion has come. The local street car
company, by formal petition has come
to the Commission saying that the
frenzied price raising in coal has caught
irand reversed, with the beginmng of
fall the favorable financial showings
ie up to that time. The company
Talking for temporary rehef a transfer
Se Ld readiustment of pay^^^^^^
by interurban companies ^or trackage
^d terminal facilities, to tide them
over this coal crisis.
The significant feature of the peti-
tion, however, is that there is indicated
no desire for a higher basic fare than
^"m^can be more remarkable than
the experience of a pubhc utihty com-
'i:^rer having gentlemen who two
years ago sat on the front steps be
moaning the denial of a six-cent fare
^S coming around and ^ymg
"We need some temporary rehef to
get us past the exorlntant coal pnce
L, but we want to hold fast to this
'^S'Si^-narenotinbus^^^^^^
for pleasure. They are intent J.n
making money^a most commendable
^S for pubhc utihties notwith-
Sng occasional short-sighted com-
S fo the contrary. Why do not
these gentlemen who now say a t^em-
^r^ry emergency faces them, petition
CaTix-centfare? Because they have
experienced a great awakemng. It
may all prove to be a mistake, but they
now are of the opinion that a higher
b^c fare than five cents, at least in
Sanapolis, would result in cutUng
down the most profitable Vftd^^
street railway company s business
th^ is, the short-haul patronage for
w£.h there is always the potential
rS^tition of that patronage's own
S^as well as the appeal of Jitneys-
Fax^ing the fact that within two
week^ I shaU sit as one of the judges m
■ Z matter, I may not, with propriety,
go into some details that Y?" niigbt
desire. However, I am entirely free
J:Tummarize the historic background
of low fares in Indianapolis From
my angle of view it covers the sub-
stantial and f midamental phases of the
subject. It is ^^^,^^^^1^^^.^^^^^^^
further back than the year 1918 when
on a decision of the supreme court of
Inchana, the Public Service Commi -
sl^n assumed jurisdiction and ehm^
nated fares of less than five cents^^
December, 1918, the company came to
the Commission for a six-cent fa^^
The Commission rejected the plea
chiefly on four revelations that re
suited from pubhc hearings.
WHY A PETITION FOR INCREASED FARE
WAS REFUSED
The first revelation was that the
company was not collecting its earned
'r^^. The Commission reached
this decision as a result of putting
trained check^son^ cars. T^^^
presence was not fuspectea.
^f the company had ^e^f ^ J.^^^^^^
of earned revenues did not exceed ^
T>er cent, and were more nearly 1 per
^nt The Commission's inspectors
Xwed a loss of 13.6 per cent on cars
checked during a six day penoj. Jhe
Commission held that "It ^^ ^^^^^?
provide increased revenues for peti
C^r if it does not collect revenues
Seady provided." The introduction
Jpa Wou-enter cars was the result
of this investigation and decision
The second revelation was that the
value of petitioner's Property did not
warrant its financial obligations. iHe
Company presented an inventory and
Xation tetaling f^^^^f^'^^.J
the Commission had ever let that val
nation get by, I^dianapohs would have
been paying a seven-or eight-cent fare.
J^m'Ve'^^y certain that officers of ^e
company now wiU agree that the
1921] INDIANAPOLIS RETAINS THE FIVE-CENT FARE
financial outlook under such conditions
would not be as favorable as it is now.
The hearing revealed values only a
little in excess of half the twenty-eight
million six hundred thousand dollars.
No one, except local taxing officials,
who have assessed the company at
almost twenty million dollars, is now
claiming a value in excess of $16,000,000
or $16,500,000. When a service-at-
cost proposal was laid before the Com-
mission this year the city and company
practically agreed to a valuation of
$15,000,000.
From the date of its decision, the
Commission has had the co-operation
of officers and various groups of stock
and bond holders in working out a
voluntary reduction of obligations to
a proper basis. A superimposed hold-
ing and operating company, the In-
dianapolis Traction and Terminal Com-
pany, was eliminated. Four million
dollars of common stock for which
there was no substantial background
was wiped out, and two million one
hundred and eighty of interest bearing
bonds, held in sinking funds, were can-
celled, thus reducing securities approxi-
mately $6,180,000. Also $1,000,000 of
stock was made junior to such an extent
that it cannot be considered a liability.
Securities were thus reduced approx-
imately 30 per cent. Indianapolis
Street Railway stockholders who had
been slumbering in comfortable berths
with the assurance of guaranteed stock
dividends, were called forth to operate
their property and to assume the
hazards of preferred stockholders.
The third revelation was of a
device that was not uncommon in
the profitable days of unregulated
street railroading. This device was a
sinking fund for the retirement of
bonds. The street car riders were not
only to guarantee dividends to a non-
operating company, but were also to
wipe out the bonded indebtedness.
119
One hundred twenty thousand dollars
annually was going into this sinking
fund. Also, the bonds which, it
would seem, should have been annually
retired were continuing to draw in-
terest. Payments to the sinking fund,
and payment of interest on bonds held
in the sinking fund, were amounting
annually to almost $200,000 of money
that was badly needed for property and
service.
When the Commission pointed out
that this plan, simply analyzed, meant
that the public was placed in the
position of giving to the company not
only sufficient fares to maintain and
operate service, but also ultimately to
give the company its property, and
that such a plan was not at all consist-
ent with regulation which, for emer-
gency relief, the company was seeking
to come under, there again was fine
co-operation on the part of the bond
and stockholders and officers. At
least temporarily the sinking fund
provisions are waived. Most advan-
tageously to all concerned, the waiver
provides that this money go into bet-
terments. This means better security
for bond and stockholders; better
service for the rider.
The fourth controlling revelation
was that the community was drained
dry of its young men, who were among
the 4,000,000 away to war; that the
absence of this vital part of the popula-
tion, together with the absence of
naany young women and the depres-
sions of war, had very nearly stopped
social activities; that influenza epidem-
ics, sweeping the nation, had all but
suspended local shopping, theatre and
moving picture traffic; and that locally
industrial activity was not normal.
The Commission, in its denial, took
all these conditions into consideration.
It accurately forecasted reassumption
of normal life and greater traffic. The
change came with a rush. In 1918
120
NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb.
justment has come, it is naturally to be
presumed that this area will be least
and last, affected.
When the company came to the
Commission its plea was that it was at
bankruptcy's door. Its tracks and
pavements were in bad condition; the
condition of its rolling stock was ag-
gravatingly proclaimed by flat wheels;
its finances were such, it was repre-
sented, as not even to permit the
installation of rather inexpensive fare
collecting boxes, or pay-as-you-enter
equipment; its operating forces were
not good; four much needed extensions
were not forthcoming.
There are, of course, critics and the
impatient. Everything that is de-
sired has not been accompUshed. Cars
are crowded during rush hours. But
those who will stop to survey the situa-
tion, must agree that, under the reor-
ganization, with a five-cent fare and
universal transfer, and in face of the
most adverse conditions the country
has ever known, there has been in the
short period of two years a decided
change. All cars have been made
pay-as-you-enter; new cars have been
purchased and open cars have been
converted into closed cars, and some
of these are of exceptionally good type;
the operating force is of higher stand-
ard; flat wheels have disappeared and
general maintenance has greatly im-
proved; three of the four extensions,
the College avenue, the Shelby street,
and the Premier motor car plant ex-
tensions, have been made, and the
fourth, the Illinois street extension, is
scheduled for next spring, unless the
world upsets again. Diu-ing this pe-
riod the city has done a great work in
street reconstruction and the street car
company is struggUng along with that.
No one would presume to say all
things are 100 per cent good, or even
90 per cent good. I am, however,
asking you who five in six, eight and
1921] INDIANAPOLIS RETAINS THE FIVE-CENT FARE
121
the Indianapolis street cars transported
70,003,795 revenue passengers; in
1919 the trafl&c jumped to 84,051,850
passengers; in 1920 it will probably
pass the 94,000,000 mark.
Briefly then, in answering to my
subject "The Five-Cent Fare in In-
dianapolis," I would summarize by
saying that its foundation Ues in:
(1) Elimination of unwarranted financial obli-
gations;
(2) Elimination of a holding company— and,
incidentally, the elimination of absentee land-
lordism;
(3) Awakening to the fact that the short
haul passenger is the profitable passenger;
(4) Collection of earned revenues;
(5) Taking into calculation subnormal traffic
conditions in the war period and correct fore-
casting of increased volume of traffic after 1918.
(6) A healthy spirit of co-operation;
(7) An intelligent handling of the whole
situation by the city;
(8) Better public relations.
ADVANTAGES POSSESSED BY INDIAN-
APOLIS
It is true that there are other condi-
tions which contribute fundamentally
to make it possible for Indianapolis to
be, when the readjustment is past —
"The Five-Cent Street Carfare City."
These advantages are geographical and
social. ^ J
The street car company mines a
large amount of its own coal in fields
located near to Indianapolis and this
means cheaper fuel costs than those
faced by most companies. Wages and
cost of hving all through the war
period have been at somewhat lower
levels in Indianapolis than those
prevailing in the zone of greatest war
activities and excesses which reached
back from the Atlantic seaboard
through Buffalo, Pittsburgh, Youngs-
town, Cleveland, Detroit, to Chicago.
This applied to street raihoading.
Now, that the national period of read-
ten cent street car cities and who have
well in mind what your own cars and
service and extension inadequacies are,
do you really think there is very sub-
stantial ground for complaint from the
five-cent car riders of Indianapolis or
the city itself?
I desire specifically to disavow any
intention of saying that continuation
of the five-cent fare would have been
possible for all companies and cities.
I am fully aware that it could not, for
it has been our duty, as a public
service commission, to put higher than
a five-cent base fare into six Indiana
cities. I do believe, however, that
many cities did not try out the possi-
bilities of the five-cent fare.
Looking at the street car situation
nationally, it appears that the peak
has been reached in operating costs,
and that the break is near at hand.
Still the skies are not clear. Industrial
letting down will likely increase any
baneful effect of high fares which may
fundamentally, but not now obviously,
exist. High fares are not going to get
some street car companies past the
sheriff for the reason that there have
not been fundamental readjustments
of financial obligations and elimina-
tion of needless superimposed operat-
ing companies.
The aftermath of the war also is
generally marked by heavy increases
in local taxation. Papers last week
announced the inauguration of the
six-cent fare in Cleveland and gave as
one of the reasons for the increase, at a
time when prices are falUng, a $150,000
increase in local taxation falling on the
company. In Indianapolis at just the
time when we began to look on favor-
able operating sheets the same burden
fell.
The whole subject of taxation — di-
rect and indirect — of the conveyance
of the masses of urban population
loudly cries for careful study. Direct
taxation, franchise tax and paving
streets will, during the coming year call
for almost eighteen per cent of the fare
paid by Indianapn^Us street car riders.
I would make a general observation
that is applicable to the IndianapK>lis
situation: When the water has been
squeezed out, and securities represent,
and are warranted by values of prop-
erty put to pubHc service, those finan-
cial obhgations must be protected.
Occasionally the shortsighted demand
that these legitimate demands be
passed or deferred.
Laying aside all moral considerations
what — especiaUy to-day when all the
world wildly is bidding for money for
rehabilitation — can be so detrimental
to a community as such a course?
IndianapoUs is typical of all cities.
It is growing with marvelous rapidity,
ten per cent every three years. Street
car lines must be extended so it can
expand. More and better cars must be
provided to carry more citizens. More
power house capacity must be had to
move these cars. The chairman of
the board of works of this city says
that $1,500,000 to $2,000,000 must be
sj>ent by the local company next year
to keep transportation apace with
city growth. In this and all other
cities, such heavy expenditures must
constantly continue year after year.
The great need of the street railway
industry is credit.
Where is this money to come from?
From security holders who are unfairly
dealt with? From bankers and other
custodians and trustees of money who
see legitimate obligations ignored? Or
are the cities in a position to furnish
the capital needed to keep local trans-
portation abreast with their growth?
SERVICE AT COST
In April this year, the city of
Indianapolis laid before the Commis-
120
NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb.
1921] INDIANAPOLIS RETAINS THE FIVE-CENT FARE
121
1^
the Indianapolis street cars transported
70,003,795 revenue passengers; in
1919 the traffic jumped to 84,051,850
passengers; in 1920 it will probably
pass the 94,000,000 mark.
Briefly then, in answering to my
subject "The Five-Cent Fare in In-
dianapolis," I would summarize by
saying that its foundation Ues in:
(1) Elimination of unwarranted financial obli-
gations;
(2) Elimination of a holding company— and,
incidentally, the elimination of absentee land-
lordism;
(3) Awakening to the fact that the short
haul passenger is the profitable passenger;
(4) Collection of earned revenues;
(6) Takmg into calculation subnormal traffic
conditions in the war period and correct fore-
casting of increased volume of traffic after 1918.
(6) A healthy spirit of co-operation;
(7) An intelligent handling of the whole
situation by the city;
(8) Better public relations.
ADVANTAGES POSSESSED BY INDIAN-
APOLIS
It is true that there are other condi-
tions which contribute fundamentally
to make it possible for IndianapoUs to
be, when the readjustment is past —
"The Five-Cent Street Carfare City."
These advantages are geographical and
social. ^ ,
The street car company mines a
large amount of its own coal in fields
located near to Indianapolis and this
means cheaper fuel costs than those
faced by most companies. Wages and
cost of living all through the war
period have been at somewhat lower
levels in Indianapolis than those
prevaiUng in the zone of greatest war
activities and excesses which reached
back from the Atlantic seaboard
through Buffalo, Pittsburgh, Yoimgs-
town, Cleveland, Detroit, to Chicago.
This applied to street raibroading.
Now, that the national period of read-
justment has come, it is naturally to be
presumed that this area will be least
and last, affected.
When the company came to the
Commission its plea was that it was at
bankruptcy's door. Its tracks and
pavements were in bad condition; the
condition of its rolling stock was ag-
gravatingly proclaimed by flat wheels;
its finances were such, it was repre-
sented, as not even to permit the
installation of rather inexpensive fare
collecting boxes, or pay-as-you-enter
equipment; its operating forces were
not good; four much needed extensions
were not forthcoming.
There are, of course, critics and the
impatient. Everything that is de-
sired has not been accomplished. Cars
are crowded during rush hours. But
those who will stop to survey the situa-
tion, must agree that, under the reor-
ganization, with a five-cent fare and
universal transfer, and in face of the
most adverse conditions the country
has ever known, there has been in the
short period of two years a decided
change. All cars have been made
pay-as-you-enter; new cars have been
purchased and open cars have been
converted into closed cars, and some
of these are of exceptionally good type;
the operating force is of higher stand-
ard; flat wheels have disappeared and
general maintenance has greatly im-
proved; three of the four extensions,
the College avenue, the Shelby street,
and the Premier motor car plant ex-
tensions, have been made, and the
fourth, the lUinois street extension, is
scheduled for next spring, unless the
worid upsets again. During this pe-
riod the city has done a great work in
street reconstruction and the street car
company is struggling along with that.
No one would presume to say all
things are 100 per cent good, or even
90 per cent good. I am, however,
asking you who Uve in six, eight and
L>
ten cent street car cities and who have
well in mind what your own cars and
service and extension inadequacies are,
do you really think there is very sub-
stantial ground for complaint from the
five-cent car riders of Indianapolis or
the city itself?
I desire specifically to disavow any
intention of saying that continuation
of the five-cent fare would have been
possible for all companies and cities.
I am fully aware that it could not, for
it has been our duty, as a pubUc
service commission, to put higher than
a five-cent base fare into six Indiana
cities. I do believe, however, that
many cities did not try out the possi-
bilities of the five-cent fare.
Looking at the street car situation
nationally, it appears that the p>eak
has been reached in operating costs,
and that the break is near at hand.
Still the skies are not clear. Industrial
letting down will likely increase any
baneful effect of high fares which may
fundamentally, but not now obviously,
exist. High fares are not going to get
some street car companies past the
sheriff for the reason that there have
not been fundamental readjustments
of financial obligations and elimina-
tion of needless superimposed operat-
ing companies.
The aftermath of the war also is
generally marked by heavy increases
in local taxation. Papers last week
announced the inauguration of the
six-cent fare in Cleveland and gave as
one of the reasons for the increase, at a
time when prices are falling, a $150,000
increase in local taxation falling on the
company. In Indianapolis at just the
time when we began to look on favor-
able operating sheets the same burden
fell.
The whole subject of taxation — di-
rect and indirect — of the conveyance
of the masses of urban population
loudly cries for careful study. Direct
taxation, franchise tax and paving
streets will, during the coming year call
for almost eighteen per cent of the fare
paid by IndianapoUs street car riders.
I would make a general observation
that is appUcable to the IndianapoUs
situation: When the water has been
squeezed out, and securities represent,
and are warranted by values of prop-
erty put to pubUc service, those finan-
cial obligations must be protected.
Occasionally the shortsighted demand
that these legitimate demands be
passed or deferred.
Laying aside all moral considerations
what — especiaUy to-day when aU the
world wildly is bidding for money for
rehabiUtation — can be so detrimental
to a community as such a course?
IndianapoUs is typical of aU cities.
It is growing with marvelous rapidity,
ten per cent every three years. Street
car Unes must be extended so it can
expand. More and better cars must be
provided to carry more citizens. More
power house capacity must be had to
move these cars. The chairman of
the board of works of this city says
that $1,500,000 to $2,000,000 must be
spent by the local company next year
to keep transportation apace with
city growth. In this and all other
cities, such heavy exp>enditures must
constantly continue year after year.
The great need of the street railway
industry is credit.
Where is this money to come from?
From security holders who are unfairly
dealt with? From bankers and other
custodians and trustees of money who
see legitimate obUgations ignored? Or
are the cities in a position to furnish
the capital needed to keep local trans-
portation abreast with their growth?
SERVICE AT COST
In April this year, the city ci
Indianapolis laid before the Commis-
6
in
NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb.
1921] INDIANAPOLIS RETAINS THE FIVE-CENT FARE
123
:. H
! i
sion a service-at-cost plan. It was
designed to strengthen the credit of
the local company. Officers of the
company were most favorable to the
plan. Most of the members of the
Commission thought that at last the
formula for the solution of the local
street railway problem had been offered.
I was enthusiastic. Mr. Samuel Ash-
by, corporation counsel for the city,
had made a study of the Cleveland,
Montreal, Boston and other service-at-
cost plans that — especially the Cincin-
nati plan — ^had been nationally pro-
claimed as being the latest and best
thought. He had particularly studied
the great problem of inspring incentive
and initiative in the operating com-
pany. His plan incorporated — and
I beUeve improved upon — the Cin-
cinnati idea of giving the company
higher retiu-n for lower fares. Effi-
ciency was to be rewarded by maximum
returns; inefficient operation was to
be penahzed. The plan suggested just
what rate of return should apply to
each step of fare. Mr. H. H. Horn-
brook, attorney for the street car com-
pany, thought, with possible minor
changes, the plan was good.
It was agreed that it would be well
personally to make the rounds of some
of the nearby service-at-cost cities for
the purposes of picking up suggestions
and perfecting the plan so that when
it was put into effect " The Indianapolis
Service-at-Cost Plan" would supplant
the Cleveland and Cincinnati plans as
a national model. With high spirits
we began our journey — ^Ashby, Horn-
brook, and myself — all service-at-cost
advocates. We did not Umit ourselves
to interviews with the companies, or
the cities. We checked statements of
one against the other, and then made
independent investigations. It was
not long until we began to be less as-
sured that we had found a panacea.
We came home to think it over. It
was mutually agreed to wait imtil
business trips carried us, individually,
within striking distance of more dis-
tant points for further investigation.
In the meantime the Commission was
being subjected to criticism, together
with some hammering, for delaying the
adoption of service-at-cost. The term
had, as usual, made its popular appeal.
After the three friendly investiga-
tors had come to a unanimous decision
there still remained different points of
view among the public service com-
missioners which, with sickness, re-
sulted in further delay. The first of
this month Mr. Ashby, author of the
original projwsal, filed with the Com-
mission a motion to withdraw it. The
company did not object. Recently
the Commission, without a dissenting
vote, acted in the affirmative on the
motion. In his motion for withdrawal
Mr. Ashby says:
We have been unable to find or agree upon
any plan of operation on the basis of serv-
ice-at-cost which would furnish'^the incentive of
private ownership in an operation of service-at-
cost. The result of our investigations gener-
ally has been to raise a most serious question and
doubt as to the wisdom of the service-at-cost
plan. The inevitable tendency seems to be for
the operator or company readily to accept in-
creased cost of operation with the view that it
can be passed on to the public by higher fares.
Such a course results in only adding to the
burden of the public.
Experience has demonstrated that any in-
crease in fare above the normal fare, results in
a very substantial reduction in the number of
passengers carried, and has a tendency at the
same time to increase the cost of operation, so
that the financial results of the company under
such a plan is unsatisfactory and in some cases
disastrous.
The experience of Cincinnati is a good il-
lustration of the operation of the plan. The
fare was increased from five cents to six cents
and from six cents to seven cents, and from seven
cents to eight cents, and during the compara-
tively short time in which the plan has been
in operation the company has accumulated a
,''^
very large operating deficit of over $2,000,000.
During practically the same time the In-
dianapolis Street Railway Company has been
operating under the emergency order of the
Commission at five cents. It has been able, as
heretofore stated, to operate without a loss, its
revenues have been more than its operating ex-
penses and sufficient to pay a reasonable return
on the fair value of its investment.
I have little to add to his brief
summary. The Commission does not
pronounce the verdict of nostrum on
service-at-cost, nor dogmatically cast
it out of all future consideration.
DANGERS AHEAD
It must, however, be confessed that
it is suspicious of it. We, at least, will
wait to see whether it proves to be
panacea or nostrum. Personally, I
am apprehensive. I have heard popu-
lar acclaim of other epigrammatic
panaceas. " Let the people rule " gave
us the direct primary which seems not
to have met all the exi)ectations of its
friends, or the expectations of all of its
friends; "cost-plus" has been repudi-
ated; "he kept us out of war," only
won an election.
The remarkable thing to me is that
service-at-cost did not appeal to every
one. I recall numerous adverse com-
ments. One is sufficient. When the
hammering of the Conmiission to " save
the company" by adopting the service-
at-cost proposal was at its height, an
elevator operator said to me "What
is the Commission going to do,
Mr. Lewis?" I repUed that I did
not know. His answer surprised me:
"Service-at-cost is the Umit — ^put that
in and the company can do anything
and charge it up to the riders." My
elevator operator hit on the head one
of the chief defects, and one which it
seems to me is fundamental.
For example: Coal is hard to get
and the price is very high. A service-
at-cost street car operator who already,
as in most places, finds it imj)ossible
to earn the maximum return and is
assured of the minimum which will
cover fixed charges, is called on by a
representative of a coal company.
He has plenty of coal for sale — good
coal at that. Why should this street
car executive worry about its price?
Why should he join in the night and
day scramble of other public utility
operators who do not have his sinecure,
and who are struggling to get coal for
a low price in order to pull them through
and give their people some return on
their investment? It is true that they
may be able to buy coal at $4.00 a ton,
but here is coal offered to him in his
nice warm office at $6.00. It goes into
operating costs. All right — service-
at-cost covers all operating costs. I
fear that service-at-cost simply means
that the lid is taken off.
It is possible that some time in the
f utiu-e some workable plan incorporat-
ing incentive for efficiency and ini-
tiative will be worked out. While the
Commission does not pass finally on
service-at-cost, nevertheless it seems to
most of us to run contrary to human
nature, which, at least in business,
requires opportunities of a struggle
for gain. Psychologically, the blocking
out of rates which shall apply if
operating expenses increase, threatens
to become an open invitation for
laxity.
There is still another possible defect.
Service-at-cost is closely connected
with city halls. Quite often city halls
are closely connected with poUtical
organizations. Again, quite often po-
litical organizations are connected with
various interests. When one ventures
into the field of speculation of what
may happen to service-at-cost after the
novelty wears off, and after changes
in management supplant men who
may have pride in keeping their plants
I
124 NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb.
up and their operating costs down,
one finds that the possibiUties rival
those which have brought cost-plus
into disrepute.
It is possible, for example, that
a coal operator, standing in with a
highly politicalized city hall crowd,
could obtain a contract for supplying
coal to the service-at-cost utiUty at a
price considerably in excess of a fair
price. It is possible that real estate
developers, operating through such a
city hall, could cause the construction
of losing lines to their projects. A tie
between a political machine and the
street railway would open the door
to every sort of a demogogue and
agitator. These are only a few of the
possible diseases that may attack
service-at-cost in its maturity. I do
not beUeve that, up to this time, they
have developed to any great extent.
I sincerely hope they will not develop.
During the last campaign we have
seen, notably in New York and
Chicago, the street carfare made the
football of poUtics. My incUnations —
I am not saying that they may not be
wrong, but nevertheless they are my
incUnations reached after a study of
pubhc utilities on four continents
during a period of twenty years — are
that it is very desirable that public
utiHties be removed just as far as
possible from the very conditions
which I fear service-at-cost invites.
I strongly believe in the poUcy
of delegating regulation to men who
will give their time and best thought
to the subject and who are selected
because of fitness for their work, and
to the removal of such supervision and
regulation from too close contact
with local influences and prejudices,
which we know by experience are some-
times narrow, bUnd and dogmatic.
Such regulation permits of the accom-
plishment of those things enumerated
herein, which have resulted in both
the five-cent fare and solvency of the
street car company in Indianapolis,
and in Indiana, while all around are
higher fares and wreckage.
As a final thought, the theory of
regulation of public utilities is service-
at-cost. Regulatory bodies determine
rates by making them only sufficient
to cover:
1. Operating costs.
2. The replacement of the wear and
tear of the plant — depreciation.
3. Taxes — but not individual income
taxes.
4. A fair and reasonable return upon
the fair value of property used and
useful in performing the pubUc service.
When you have based your rate on
those foundations you have a service-
at-cost.
In behalf of such control, I would
point to the fact that not one of the
118 electric railway receiverships in the
coimtry is in Indiana; that only six of
the 600 cities having more than a five-
cent fare are in this state, and that the
electric railways in this state emerge
from the trying ordeals of the war
period and the more trying ordeals of
the post-war period, solvent and full
of hope.
CLEVELAND— SERVICE-AT-COST AND
EFFICIENT MANAGEMENT
BY FIELDER SANDERS
City Street Railroad Commissioner, Cleveland
On Sunday, November 14, 1920, the
rate of fare in Cleveland was auto-
matically raised, under the Tayler
"Service-at-Cost" grant, to a six-cent
<;ash fare, nine tickets for fifty cents,
one cent for transfer and no rebate. No
objection was made by the city, be-
cause the stabilizing fund being below
$300,000, under the franchise the com-
pany had the absolute right to raise
its charges. The fare on March 1,
1910, at the inception of the Tayler
grant was three cents cash, five tickets
for fifteen cents, one cent for transfer
and no rebate. It is, therefore, the
fact that after more than ten years of
operation under the Tayler grant, the
fare paid by the car riders has almost
doubled, the exact figure being the
difference between 3.33 cents, the aver-
age fare paid in 1910 in Cleveland, and
5.90 cents, the average fare which will
be paid under the present rate, an
increase of 77 per cent.
This makes an examination of the
franchise and a survey of the operation
of the railway company, thereunder,
peculiarly fitting at this time in deter-
mining whether service-at-cost has
been a success or a failure, or to what
extent it has been either. In my judg-
ment it has certainly not proved a
*' Nostrum" "a quack medicine," but
possibly has not quite approached a
'* Panacea'' or "an absolute cure for all
ills."
The street-railway situation in Cleve-
land for many years prior to 1910 was
that of operation by private companies
with the usual competition, and five-
125
cent fare, with a slightly reduced ticket
rate. These companies consolidated,
the fare remaining at five cents on all
lines, but with added transfer privileges
for which no charge was made. This
was followed by a bitter fight on the
part of the city authorities for a lower
fare, which after much warfare cul-
minated in the present settlement. At
the time of the adoption of the fran-
chise, as for many years before, the car-
riders were paying five cent fare, eleven
tickets for fifty cents with universal
free transfers. It was claimed that,
under proper management, with the
proper franchise, the car riders could be
carried for three cents. As a result of
all the dickering back and forth it was
determined that the car riders should
not be carried at five cents nor at three
cents, but at actual cost, whatever that
might prove to be. The conclusion,
therefore, of success or failure of the
plan, must be predicated upon the pur-
poses which the plan was intended
to carry out, and be a finding as to
whether those purposes have been car-
ried out.
The franchise boldly states in its
preamble an ambitious progranmie, to
wit: "^
It is the common desire of the city and the
company to have all the grants of street-railway
rights then outstanding surrendered and renewed
upon terms thereinafter recited, to the end that
the rate of fare may be reduced, the transfer
privileges made definite, and the right of the city
as to regulation and possible acquisition made
definite and certain, and that a complete read-
justment of the street-railway situation should
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NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb.
II
1 )
I I
126
be made, upon terms that would secure to the
owners of the property invested in the street-rail-
way security as to their property, and a fair and
fixed rate of return thereon, at the same time se-
curing to the public the largest powers of regula-
tion in the interest of jniblic service, and the best
streetrraUroad transportation at cost, consistent
with the security of the property, and the cer-
tainty of & fixed return thereon, and no more.
It will not be claimed by anyone that
any of these declared objects of the
franchise is or was anything but desir-
able and laudable, except that possibly,
in view of the developments of the last
two or three years, some may claim
that a fixed rate of return, and no
more, is not now in the best interests of
the company and the public. I wiU
refer to this particular claim agam.
It will also be admitted that, if these
objects of the grant have been substan-
tially carried out, a great civic benefit
has resulted.
The questions therefore before us
are. Has the rate of fare been reduced,
the transfer privilege made definite, the
city's regulation effective? Have the
owners had security for their property,
and have they had a fair and fixed rate
of return, have the car riders had the
best street-railway transportation at
cost? If so, haw has it been done, and
what is there about the franchise, or the
management, or the surrounding cur-
cumstances that has made such a con-
clusion possible?
ARBITRATION BOARD ENDORSES TAYLER
GRANT
The question of the failure or success
of a contract is ordinarily determined
usually by the facts themselves, but
sometimes by the opinion of experts
who have gone over the facts and have
drawn conclusions therefrom in the
light of testimony and their experience.
I desire to present in evidence an opin-
ion first, which combines the two
methods. During the last half of the
year 1919 and the first half of the year
1920, the city of Cleveland had a very
lively controversy with the Cleveland
Railway Company to determme the
question whether the fixed return of 6
per cent provided in the original fran-
chise should be changed to 7 per cent.
This finally developed into a popular
vote at a referendum, which resulted
unfavorably to the company, as such
matters usually do when placed before
the public. But in the middle of the
controversy a very extended hearmg
was had before a board of arbitrators.
This board of arbitrators went into
the financial condition of the company
and all matters surrounding it very
thoroughly. The hearing consumed
many weeks. Financial and street-
railway experts from all over the coun-
try testified, both in behalf of the city
and in behalf of the company. The
city lost the arbitration so far as the 7
per cent question was concerned, but in
the decision of the board, the franchise,
the management of the company and
the actions of the city in its regulating
capacity received a very illuminating
commendation. The board said:
The franchise and the amendments thereto
have been shown by ten years of trial to be sound
in principle, practical in operation, and of great
benefit to the Cleveland Railway Company and
its stockholders and to the public. It has kept
the Cleveland RaUway Company from exposure
to the dangers and misfortunes that have over-
taken other railway properties in most other
large cities. The protective features of the
franchise, together with the high standard of
raUway management and intelligent municipal
supervision which the Cleveland Railway has
had, have resulted m giving to Cleveland the
best street-railway service at the lowest cost of
any city in the United States. The testimony
has taken a wide range. . . • The city street
raihoad administration has always been efficient
and keen to the pubUc interest, and there is no
reason to believe that it will be otherwise in the
future. . . . The evidence shows that this
1921]
CLEVELAND— SERVICE-AT-COST
127
railway property has been maintained at a high
standard, that it justly enjoys the reputation of
being the best managed, best equipped and most
successful street-car enterprise in the country.
We have been shown that a higher percentage of
expenditure for maintenance and upkeep has
been in force here than in any other cities. Ex-
perts have analyzed the situation and presented
the conclusions to us, that by reason of efficient
and intelligent executive management, and by
reason of the high rate of upkeep and mainte-
nance, a large appreciation in the value of the
property has resulted. . . . The most im-
portant result of this hearing is the full and com-
plete illumination of the question of the safety
of the Cleveland Railway stock as an investment.
A right understanding of the franchise discloses
that the stock of the Cleveland Railway Com-
pany is safeguarded and protected so as to be-
come a quasi-municipal investment. . . .
We have no difficulty in reaching the conclusion
that this stock is protected and safe to the
investor. . . .
This was the decision of an unbiased
court on the facts before it.
THE TESTS OP FARES AND SERVICE
Let me now briefly examine the facts
themselves, of ten years of operation,
to see if they show that the franchise
has carried out its objects, if this par-
ticular service at cost has made good.
Considering increased fare first, the ob-
jection that the fare has almost
doubled under service at cost might be
dismissed with the statement that
every other commodity has doubled in
price in the last ten years, and that it is
only in accordance with the general
economic trend of the last ten years
that the price of a ride in Cleveland is
now almost twice what it was in 1910.
The wages of the trainmen operating
the cars, for instance, have increased
188 per cent since 1910.
But if that alone were said, we would
be justified in concluding that the
franchise has not been a moving factor
in improving matters, but has simply
ridden with the general trend of events.
The fare at its inception was about
two cents lower than the fare in other
cities through the country, with one or
two possible exceptions; it has stood
through the years at the same ratio to
rates general elsewhere, and, notwith-
standing this last raise, it is still lower
than most, and possibly still at the
same ratio to the fares in other cities.
One tremendous result of this low fare
in Cleveland not to be forgotten is the
fact that its car riders in eight years
between 1910 and 1918 have saved
more than thirty million dollars, over
and above what they would have paid
if the fare had continued to be five
cents under the pre-existing private
management as in other cities; or, in
other words, they have saved for their
own use an amount which, if it had
been put in a sinking fund, would have
purchased all of the railway company's
property in September, 1918. From
the public's standpoint, this one fact
alone has justified the Tayler franchise.
But that fact is only the more obvi-
ous of results obtained for the car riders.
Examining further, notwithstanding
the low price of our service, statistics
show that from 1910 to 1920, while the
population in the city and suburbs
increased 40 per cent and the number
of fares paid increased 75 per cent, the
service given in Cleveland has doubled.
The Broadway, Euclid, Payne and St.
Clair lines east of the river, and the
Lorain and Detroit lines west of the
river, the six heaviest trunk lines of the
system, show in their headways that
during 1910, in the morning rush
period, 7,790 seats per hour were fur-
nished; 3,192 seats per hour on the base
tables and 9,690 seats per hour in the
evening rush period. The present
headways on the same six lines furnish
15,700 seats per hour in the morning
rush, 5,590 seats hourly on the base
tables and 19,300 seats per hour in the
evening rush, an increase of 102 per
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NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb.
II
cent in the morning rush, 75 per cent
on the base tables and 99 per cent in
the evening rush. I am giving seats
rather than headway because of the
difference in the equipment .
The number of passenger cars has in-
creased from 955 in 1910 to 1,515 in
1920. Great changes in the character
and size of the cars have been made.
The average seating capacity of the old
cars was about 38; the newest cars seat
58 and 60. The total seating capacity
of the 1910 equipment was 36,100, of
the 1920 equipment 74,800. The total
standing capacity was 44,000 in 1910;
in 1920 it is 80,460. So that while the
number of cars has not doubled, the
seating capacity has more than doubled,
and the combined seating and standing
capacity is almost double. In these ten
years 375 of the 955 cars owned in
1910, nearly 40 per cent of the total,
have been retired, so that there are
now on the system, of 1,515 cars, only
580 that are more than ten years old.
In the same period of time, the com-
pany has developed a large number of
additional lines within the city (a
smaller number outside). In 1910 the
railway operated 246 miles of track,
exclusive of special work, track in car
yards, etc. Today it operates 303
miles, an increase of 23 per cent . Most
of this increase is in new trunk lines
and new cross-town lines within the
original Hmits of the city of Cleveland,
although some of it represents pushing
out into the country. In addition al-
most the entire layout of car houses,
shops and power stations has been
completely renewed. Many new most
modern car stations have been built.
The various power-generating stations
have been abandoned, except one,
which is on the programme for disman-
tling in the near future. Power is
being purchased, and many new sub-
stations have been built or are under
way for distributing purposes. The
finest street-railway shops in the world
have been built, at a cost of $1,300,000.
The company has developed in the last
three years an extensive plant for han-
dling materials in its maintenance-of-
way yards, and has added all kinds of
improved conveyors, trucks and labor-
saving machinery for doing its work.
The 935 cars added to the system since
1910 have been in each instance of the
latest and most efficient type, some of
them built in the shops of the company
by direct labor, others purchased. Of
the original 246 miles of track existing
in 1910, 162 miles have been renewed,
about 66 per cent of the original track-
age, and the average age of all the pres-
ent tracks on the system is very close to
nine years . The number of cars owned
per mile of track has increased from
3.9 in 1910 to 5.05 in 1920. The fare
remained at 3.33 cents until December
15, 1917, and since that time has been
at varying rates, most of the time
5.33 cents.
It is apparent from the foregoing
brief summary, without going into de-
tail, that the fare has been low, the
service has been high, and that the
property has been well kept up and
highly improved, under service at cost
a real railway has been developed, to an
extent so noticeable as to merit and re-
ceive the commendation of every
street-railway man who surveys it, and
so different from practice general else-
where that many public addresses on
this subject have summarized it by
saying, "The railway has grown from a
scrap heap in 1910 to the finest prop-
erty in the United States in 1920."
ARE ALL PARTIES SATISFIED?
Another and third way of testing
whether a contract has carried out its
purpose, in addition to the opinion of
experts and the actual facts hereinbe-
fore detailed, is to analyze the effect
1921]
CLEVELiVND— SERVICE-AT-COST
129
which the contract has had upon the
parties interested, with particular refer-
ence to their conduct under and general
satisfaction with the contract. Satis-
faction with an arrangement by all par-
ties to it does not always prove that the
arrangement is a good one calculated
for their mutual advantage, but satis-
faction with an arrangement after a
thorough trial over a period of years,
after an exposition and public demon-
stration of claimed defects, is proof of
the inherent soundness of the contract.
The Tayler franchise has been crit-
icized at various times because of the
so-called lack of incentive in it, and
possibly on lack of other matters, al-
though no critic has ever been able to
frame a franchise which in practice has
worked better. I have at times made
the same criticism myself. But not-
withstanding the criticism, the people
of Cleveland are satisfied. We know
that to be so, because it happened that
the first period of the grant expired on
May 1, 1919, and it was necessary be-
fore that time for the city government
either to renew the franchise for a
further period of twenty-five years,
thereby extending the expiration date
ten years, or to permit the property to
continue in the hands of the company
without city control of the service, or
to exercise itis option to buy it and put
in force municipal ownership. A series
of meetings was held in the city council
chamber over a period of six or seven
weeks by the committee of council
having the decision to make. The
matter was widely advertised in the
newspapers, and especially the fact
that the grant was about to run out.
Nevertheless, all the amendments that
were offered to the grant as being de-
sirable were suggested by the city
street railroad commissioner. There
was no public sentiment manifested for
municipal ovmership, or for any partic-
ular change in the grant, except on
the part of a few councilmen and a few
public officials who had been in very
close relationship with the railway
company and its day to day operation.
No amendment was offered by any
civic society of Cleveland, of which
there are many and active, nor any
newspaper, nor by the chamber of
commerce, or any of the various clubs
interested in public matters. The rail-
way company refused to accept the
amendments, said that it was satisfied
with the franchise as it stood. It be-
came immediately evident that the
public also was satisfied with the fran-
chise and the service under it. The
result was that the council renewed the
agreement in identical terms for a
further period, and we are now operat-
ing thereunder.
THE SIX PER CENT FIXED RETURN
There is one serious problem now
pending, arising in connection with the
fixed return of 6 per cent for the stock-
holders,— a problem which is entirely
likely to face the operators of the vari-
ous new service-at-cost franchises, now
being adopted. It is the difficulty of
finding new money with which to fi-
nance extensions, betterments and per-
manent improvements. Extensions in
Cleveland have always been financed
by the sale of new stock. For more
than a year it has been impossible to
sell Cleveland Railway 6 per cent stock
at par in Cleveland, and the franchise
forbids its being sold at less than par.
The fate of all public utility stocks has
.been largely reflected in the market on
Cleveland Railway stock, through no
fault of its own. The management of
the railway made an effort to raise the
dividend rate on all their stock to 7
per cent, and failed at a popular vote.
Although extensions are needed in
Cleveland, the people evidently thought
the 7 per cent remedy too drastic and
NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb.
•I
130
far-reaching. So for the present we
are standing still— just finishing the
programme laid out a year and a half
ago. Many solutions for the future
needs of the company and city have
been suggested and debated, and I have
no doubt the problem will be worked
out satisfactorily in a mutual spirit of
co-operation, as have so many of our
previous difficulties.
THE SUCCESS EXPLAINED
The question now arises, What is the
reason for the obvious success of this
plan? There are many reasons. The
low capitaUzation at which the railway
was taken over has had some effect, of
course, but that effect has been very
largely overrated. The added expense
of a few millions to its aggregate cap-
ital value, with a return of 6 per cent
thereon, distributed among the number
of fares paid would have made an m-
crease in the rate of fare so small as to
be hardly noticeable. It would be
expressed in tenths of a cent, less than
a mill a ride. At the beginning of the
grant, an addition of ten miUion dollars
to the capital value would have made a
difference of only three tenths cent in
each fare paid, and this, of course,would
have decreased each year since. The
low capitalization was /ar more efeclive
in developing public confidence in the
honesty of the management and in the
honesty of the arrangement than m
any financial way. The whole secret
of the success of the scheme has been
the admirable combination of efficient
and jealous management of the part of
the company and its officials, of close
municipal supervision, of harmony be-
tween the company and the public, of
the confidence which the pubUc has in
the arrangement, and the ultimate fact
resulting from all of these, that the
company is financially strong, and able,
up to a short time ago, to market any
amount of its securities with which to
carry out the object of the street rail-
way. All of these have been deciding
factors in the success of the plan.
THE city's part
The city, through the council and
the commissioner's office, also guards
its rights carefully. It maintains a
complete department for the super-
vision of the company's expenses of
all kinds. It prescribes the quality
and quantity of service. In the com-
missioner's office a traffic department
maintains, through a large force of in-
spectors, a continuous check of^^®
traffic loads on the various lines of the
city, and from time to time makes
changes in the headways, in the run-
ning time, and in the cars on the vari-
ous lines to more closely balance the
service rendered with the service re-
quired. It makes all the studies and
investigations for determining any
changes necessary. The results are
tabulated, and graphs are drawn show-
ing the necessity or non-necessity for
any changes. Changes are being made
almost daily by orders to the company
to put in force new headways and new
schedules. In so doing the commis-
sioner is able to tell from day to day
whether the schedules which he pre-
scribes are being run, and to see that
the company does no more nor less
than run the service prescribed. The
traffic department also makes the
seasonal changes due to the closing of
parks and the opening and closing of
factories, makes the changes in places
of stopping necessitated by new condi-
tions, makes changes in routes neces-
sary to relieve congestion and to speed
up service, and also advises with the
operating department daily in the col-
lection of fares, loading and unloading
of passengers, the stationing of men to
sell transfers outside the cars, the pre-
1921]
CLEVELAND— SERVICE-AT-COST
131
payment areas, and all the details
which make for excellency of service.
The street railroad commissioner's
office, also, through its engineering
department, keeps close supervision
over the cost of improvements, renew-
als and ordinary repairs, and approves
them in advance of expenditures. Not
a bottle of ink is bought without the
city passing on it and approving it
first. In those matters we not only
authorize and supervise the railway
company from day to day, but we also
advise with its officers and suggest
changes and improvements. We main-
tain a day to day continuous audit.
the railway's part
The railway officials have also had at
heart not only the preservation and
development of the property, but pride
in themselves as successful managers.
They have co-operated in every way in
increasing the efficiency of the service.
They have largely initiated a great
many of the reforms which have made
Cleveland street-car service a model of
the country. They have adopted and
carried out many of the suggestions
made by the city. The result has been
the employment of almost every new
idea in street-railway operation, usually
some years in advance of the rest of the
country, such as the skip-stop, the
speeding up of schedules, short-routing,
cross-town fines, prepayment areas,
pay-enter and pay-as-you-leave fare
collection, the most modern — the-pay-
as-you-pass — street car; the purchasing
and distribution of power instead of
costly generating plants; modern car
shops, car stations and automatic power
sub-stations; scientific and exactly
sufficient schedules of service, the last
word in maintenance-of-way equip-
ment, materials and yards, labor-sav-
ing machinery of every kind, the scien-
tific training of employes in a separate
school and department equipped with
machinery and instructors for that pur-
pose, careful and strict discipline of the
employes; in short, most of the ad-
vancements and improvements in
street-railway management of the last
ten years have originated or been tried
in Cleveland. The peculiarly close
combination of company management
and city supervision has enabled Cleve-
land to devise and put in force every
possible economy which tends to
efficiency.
DOES THE PLAN LACK INCENTIVE?
I think that most of the criticism of
the service-at-cost plan as developed
in Cleveland in the last ten years, as to
the lack of incentive, is really directed
at the conditions of the franchise and
not at the working out of the same as
shown in actual operation. Cleveland
is not under absentee ownership.
Clevelanders own the company. The
management in Cleveland are all
heavy stockholders in the company
and are directly interested; therefore
it is not really management of paid
service alone, but it is a management
largely by stockholders themselves.
Some of its success is due to that. In
this management they have also the
benefit of daily counsel and criticism,
not monthly or annually such as is
granted by public state commissions.
Nor has the criticism been selfish,
partisan or political criticism, such as
has so often developed at the hands of
political bodies and newspapers in
other cities.
TOM JOHNSON OPPOSED THE SLIDINO
SCALE
In the meetings in March, 1909,
between Tom L. Johnson, mayor of
Cleveland, and Horace E. Andrews,
president of the Cleveland Railway
II
132
NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb.
Company, and various councilmen, one
of the councilmen suggested a slidmg
scale of interest, namely, that the
lower the rate of fare the more mterest
could be paid on the investment. He
said he thought there would be an
incentive then for the stockholders to
make the fare as low as possible, a saymg
which sounds very familiar now after
eleven years. Mayor Johnson then
replied, "And also quite an incentive
to skimp the service; wouldn t it.''
Mr. Andrews suggested the well-knomi
gas company arrangement in England,
and thought that it would be a fairly
good arrangement, but Judge Tayler
was firmly of the opinion that the
company should have only a fair return
on the money for the privileges granted
by the city, and that it should not be
subject to the hazards of operation.
He was of the opinion that the railway
company was entitled to earn only a
fair return for the use of the streets,
and that if by ingenuity and econom-
ical devices adopted by the operators a
re4uction in fare was accomplished,
and if thereby they obtained more
than a fair return on the money, or,
as he expressed it, an abnormal rate on
their investment, there was something
wrong somewhere.
It seemed to the judge that it was
fundamentally wrong to pay a man a
bonus for doing that for which his
salary is supposed to compensate him;
that a bonus could not be a legitimate
part of the cost, and that, therefore,
this sort of an arrangement was service
at m(yre than cost; that the people are
entitled, for the salary that they pay to
the officers of the railway, to intelligent
and efficient management, and that
they ought not to be taxed any more.
My own notion is that the idea is not
only fundamentally wrong, but that
practically it would not work because
it creates an incentive on the part of
the railway company to keep down
their expenses by skimping the service.
Under the present service-at-cost plan
the company has no desire and no
incentive to skimp the service. They
do not interfere in the slightest way
with the full latitude of the city m
exerting its power, and there is no
desire on their part to do so, because it
makes no difference to them, within
the limits of their power to earn 6 per
cent, how much or how little service is
run. But I believe any temptation of
an added dividend before their eyes,
resulting from a reduction of cost which
would make it advisable for the com-
pany to reduce its operating expense,
would create a tendency on its part to
encroach on the city's prerogative as
to service, by hampering and reducing
the service in the many small ways by
which they could do so without being
caught by even an elaborate system
of watching, and to render a cheaper
and more unsatisfactory service even
while ostensibly complying with the
city's order. Such an objective is bad.
From the stockholder's standpomt
it is an incentive for the management
not to keep the property up, because
the lower the maintenance charges, of
course, the lower the rate of fare and the
higher the return to the stockholders.
It is also an incentive to keep down the
maintenance by increasing the capi-
talization by charging repairs and
replacements to capital, which could
easily be done, thereby tending to make
the enterprise top-heavy and reduce
the physical value of the security
which the stockholders have. This
same thing would strike largely at the
service given the car riders, because
the first requisite of good service is a
high class raih-oad, sufficiently mam-
tained. Further than that, it increases
the price which the city would have to
pay on purchase and reduces the con-
sideration for the price.
A sliding scale of return based on a
1921]
CLEVELAND— SERVICE-AT-COST
133
sliding scale of fares, in my judgment
is also theoretically wrong, because the
stockholders of the company are com-
pensated by dividends, the manage-
ment of the company is compensated
by salary; in other words, the price of
money is one thing and the price of
service is another. They have no
immediate necessary connection. But
if you are going to vary the price of
money which the stockholders put
into the company in the ratio of the
rate of fare, or, in other words, the cost
of service, the law of economics would,
it seems to me, command the reverse
of the suggested arrangement. I have
heard it argued by financial experts
(especially in the last arbitration) that
there is no connection between a fair
return on money, in other words, the
price of the same, and the price of
other commodities. Others have ar-
gued that they rise and fall together. If
there is any truth in the last argument
that the price of money goes down and
up as the price of commodities goes
down and goes up, then as the cost of
labor and materials used in the street
railways, which largely determines the
rate of fare, goes down, the return on
the money invested should not go up.
But, under the present incentive
franchises, the return to the stock-
holders does go up as the fare goes
down, instead of going down as it
should if the above rule is correct.
It is also likely to be a bad arrange-
ment from a practical standpoint for
the public. According to the judg-
ment of almost everyone we have
reached the peak of high prices . There
is bound to be a decrease in the next
five or ten years. They may not drop
to the point at which they were in
1914. They may stay at a slightly
higher level. After the Civil war it
took from ten to fifteen years to bring
the prices of everything down to where
they were before the war. The same
condition obtained after the Napoleonic
wars in Europe. If history repeats
itself, by 1930 we shall be back where
we were in 1914. But even if that is
not so, it is admitted that prices must
decrease even if they do not come to
the low level of 1914. If they do
decrease, street-railway fares must
and should go down. But under the
sliding scale, what is the result from
the public's standpoint? As the costs
go down, the expense of operating is
going up by the extra amount which
the stockholders secure, which tends
again to keep the fares up.
The fare in the last five years went
up largely without the fault of the
railway companies of the country, due
to economic conditions, and I am satis-
fied that, without their action, without
any credit to them, they will, by reason
, of the same law, go down in the next
five to ten years. But even if you grant
that all these conclusions are wrong, I
think that any scheme of incentive so far
suggested is open to the criticism of
lack of effectiveness, because of the
remoteness from and lack of direct
application to the actual executives. I
cannot help thinking from my experi-
ence of service at cost, from my knowl-
edge of what has happened in the last
five years, that after all the real in-
centive to efficient management is to
give the man at the wheel, the man who
actually operates, sufficient compensa-
tion to keep his best interest in his
work, and then to have an efficient city
administration to act as the watchdog,
to criticize, advise and sit on his neck
day by day, as is done in Cleveland, to
see that he earns his salary.
To recur to the question originally
asked Panacea or Nostrum? We offer
the Cleveland franchise, as a practical
success, a sufficient remedy under its
circumstances. Experience in Cleve-
land shows, in my judgment, that
service at cost is not perfection, neither
M
V-
134 NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb.
is it a nostrum or quack medicine,
that whether it is a panacea or not,
or how closely it approaches being a
panacea, depends partly upon the
franchise, but much more upon the
development of it, upon the people
who are charged with executing it, in
whose hands it rests, and upon the
public, who, if they have confidence in
the arrangement, will make it a suc-
cess or a failure. Many criticisms of
the Cleveland plan can be made, per-
haps justly, but, as for Cleveland,
Cleveland is satisfied.
SERVICE AT COST VERSUS MUNICIPAL
OWNERSHIP
SEATTLE'S EXPERIENCE
BY C. M. FASSETT
Former Mayor of Spokane, Staff Member American City Consultants
The latest Imk in the constantly
tightening chair of public regulation of
utiUties is found in the service-at-cost
franchise. Beginning with the passage
of the interstate commerce law by
congress in 1887, pubUc regulation has
steadily, if slowly, increased the power
of government over public utility cor-
porations, gradually lifting them out
of the class of private business which
may be operated to suit the purpose of
its owners, and enforcing in increasing
measure a consideration of the needs
and the purses of their patrons, the
pubUc. As in the case of the steam-
raihoads, this progressive regulative
effort in the pubUc utiUty business has
grown up in response to the demand for
the abolition and curtailment of cer-
tain specific practices of the owners
and managers of utihty properties,
which an awakening sentiment had
condemned as contrary to the interests
of the public.
PRIVATE MISMANAGEMENT
Only in recent years has it been
recognized that a public utihty is a
natural monopoly. In fact when utiU-
ties were unregulated, the only hope of
the consumer for reasonable rates and
tolerable service was in competition.
The great municipal utilities which op-
erate in the streets of American cities
to-day are almost without exception,
consolidations of companies which were
originally started or soon developed as
competitors. The growth of urban
population was extremely rapid, but
the demand for utility service was in
greater ratio. In the decade 1900 to
1910 population in the continental
United States increased 21 per cent,
while the number of passengers carried
one mile by the steam raihoads more
than doubled, and a Uke condition pre-
vailed in municipal utihties. The pio-
neers in the utiUty business soon found
that competition was the only inter-
ference with their profits, and consoli-
dation of the competing companies
was the logical answer.
With their utilities consolidated the
pubUc soon felt the pressure of rate
increases and service deterioration,
complaints began to find their way
into legislative bodies, and public
regulation began to be attempted.
Consolidation had not increased physi-
cal assets but had greatly increased
capitalization, for not only had enor-
1921]
COST VERSUS MUNICIPAL OWNERSHIP
135
mous prices been paid for the control
of competing companies, but large
bonuses went to pay the promoters
and financiers who had brought the
consolidation about. Then if the new
concern showed profits above a fair
dividend, further issues of stock ap-
peared, the total capitalization being
based upon the earning power of the
utility in its years of greatest prosper-
ity. It was not considered good busi-
ness to apply excess profits to debt re-
tirement, nor to large dividends on
stock already issued. Either of these
practices, if they became known,
would have been the basis for a public
demand for reduced rates or better
service. Depreciation reserves were
neglected, or if they were set aside at
all it was merely as a ledger account,
and the actual money was used for
dividends on the heavily watered
stock. The rates were all the traflSc
would bear and the service was as lit-
tle as could be given without too much
public protest. Growing cities suf-
fered for much needed extensions of
utility service which were not made
because they would not show an imme-
diate profit. Street cars were designed
to carry the greatest number of stand-
ing passengers, and the arrogance of
the utility magnate was reflected in
the conduct of his lowest employe.
His responsibiUty was to his stock-
holders. His goal was more profits.
In order to ward off further compe-
tition and to defend themselves from
attack, the utilities were forced to
maintain lobbies in constant attend-
ance upon legislative bodies, and to
corrupt legislatures and city councils,
and the story of these activities fur-
nishes one of the saddest chapters in
the history of municipal government
in America. Extensive and expensive
propaganda was used to influence pub-
lic oflicials and leading citizens against
public ownership and in favor of in-
creases in rates, and the wells of public
opinion were persistently and system-
atically poisoned.
Occasionally there has existed an
honestly managed and efficiently op-
erated public utility in private owner-
ship, and to these I apologize for the
company in which I have found them.
Of all the different utilities, street rail-
way interests have been the chief of-
fenders. Ten years ago a proposal to
guarantee them net earnings of 6 per
cent on the actual value of their prop-
erties would have met with derision;
now it is the straw which they hope
will save them from drowning. Ten
years ago one might search the files of
their trade journals in vain for ad-
vocacy of public ownership; now you
find it on every page. Ten years ago
the proposal that a representative of
the public should be admitted to the
counsels of the management of the
business would have been intolerable;
to-day it has become an accepted part
of the regulative scheme.
Regulation began with the imposi-
tion of a franchise tax, usually based
on gross earnings. This was wrong in
principle in that it took revenue from
citizens in proportion to their use of
the utility, for the benefit of citizens in
proportion to their taxes; it was justi-
fied only because we had not learned
any better. We knew that the profits
of the utilities were too great, and
were groping to find the proper way in
which to curtail them. The sharp ad-
vance in the cost of labor and materials
brought about by the war, the com-
petition of the automobile and jitney,
and past methods of frenzied finance
by which the street railways were held
at the verge of bankruptcy, have now
forced them into a desperate situation.
Increased fares are a palliative which is
Ukely only to postpone the crisis.
136
NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb.
1921]
COST VERSUS MUNICIPAL OWNERSHIP
137
III
THE EFFICACY OF SERVICE AT COST
Two alternatives will save them
from destruction: municipal owner-
ship or service at cost. Both are now
being tried and we will be better able
to judge their comparative merit ten
years from now than we are to-day.
But the situation presses.
The modern service-at-cost fran-
chise puts an end to the evil practices
of utility management which I have
already outlined. It restrains finan-
cial sky rocketing, gives a reasonable
control over management, provides for
extensions and betterments, recog-
nizes the street railway business as a
natiu-al monopoly, gives the public
a little authority in the directorate, en-
forces adequate accounting, and re-
tains to at least a small extent the al-
leged advantage of leaving the business
in private management. But only to
a small extent. The dominating mo-
tive of private ownership is a desire for
profit, and business undertakings are
attractive to business men largely in
proportion to the chances of earnings
beyond the legal rate of interest. If
they can only earn 6 or 7 per cent they
might as well invest in mortgage loans
and go on a camping trip. Just now,
however, the question with them is not
future earnings, but the salvaging of
the miUions of capital which is threat-
ened with obliteration.
The crucial point in a service-at-cost
franchise is the valuation of the prop-
erty of the utility, and this is true also
of proposals for municipal ownership.
Here is a decaying business, but one
which it is essential to the public good
to keep going, at least until its suc-
cessor has been developed. Here is a
property with securities outstanding
far in excess of any reasonable estimate
of its real value. It is in much the
same condition as a manufacturing
concern whose processes are obsolete
and whose product is losing hold on
public favor. What is it worth .?* It is
not diflScult for engineers to arrive at
the value of property of a going con-
cern, one with a future, but to fix a fair
value of a street railway at the present
time is a task which staggers the ablest
expert in the business. A trolley pole
may be worth what it costs as a trolley
pole, but what if it is only an encum-
brance to the street? Are we taking
an unjust advantage in offering its
owner its junk value? The American
public wants to be fair to the public
utility interests, but it does not want
to be cheated. It does not want to buy
a work horse and get a dead carcass
which has no value except the hide.
DIFFICULTIES IN MUNICIPAL OWNERSHIP
Some cities have determined that
they will themselves own and operate
their street transportation business and
are having a very interesting time.
Many difficulties must be met and
overcome. When the most of our state
constitutions were written it was con-
sidered unsafe to allow much freedom
to city governments. Honest men
feared the entrance of the political unit
into business, even the business of sup-
plying the collective needs of its citi-
zens, and the selfish interest of the util-
ities had an easy victory in denying
the cities the right, or closing the
avenues of opportunity, to engage in
other businesses than those which did
not offer profit to private operation.
In fixing constitutional debt limits^
even in some so-called home rule states,
the full debt limit could not be reached
excepting for water supplies and sew-
ers, or less frequently, for sewers,
water and light plants. And behind
the constitution stood the legislature,
usually dominated by a combination of
interests in which the utility corpora-
tions were fully protected.
y
>
But even if the law gave authority
and opportunity, the very structure of
city government, up to the last ten or
fifteen years, was not adapted to the
new proposal of public ownership.
The public mind was not open to such
business undertakings nor were the
usual public officials competent to op-
erate them or willing to undertake the
new burden. A new light is dawning
upon American municipal life, but the
dawn comes slowly, and the greater
number of cities are to-day in the con-
dition I have just outlined. The elec-
torate is heedless, the government is
cumbersome and unresponsive, the of-
ficials are frequently changing, poorly
paid and unexpert, employes receive
appointment and hold jobs on account
of election day services, wages and
standards of efficiency are low, and
"politics" is not the science of govern-
ment but a disreputable game for
spoils. For such a city public owner-
ship of utiHties is unthinkable as a
hopeful business undertaking. Public
regulation of privately owned utilities,
having as its latest development the
service-at-cost franchise, is as far as such
a city should attempt to go.
But no city government is as good or
as bad as it might be. Extreme ex-
amples are rare. Cities are Uke the
human beings which build them and
inhabit them, containing much good in
the worst, and some evil in the bsst of
them. Bad impulses, in a city govern-
ment as in the individual, are not only
immoral, they are unintelligent, and
when that fact is discovered and both
reason and moral impulse get to work
there is sure to be a change for the
better. The decision between service
at cost and municipal ownership in
any city cannot be made on the basis
of right and wrong; it must be influ-
enced by local conditions, and par-
ticularly by the character of the city
government.
SEATTLE ACTS HASTILY
Seattle has chosen to own and oper-
ate its street railways; it took them
over by purchase on April 1, 1919, at
a price of fifteen miUions, paying for
them with utility bonds, pledging the
first application of the gross earnings
to the payment of the interest and the
gradual retirement of the principal in
the term of twenty years. Seattle is a
thriving city of 315,000 population.
Its growth during the last decade
was 33 per cent. Its population con-
tains an imusually large proportion of
intelligent, progressive, wide-awake
Americans. Its government is the
mayor-council form, the voters having
defeated a city manager charter a few
years ago. In addition to the recent
purchase of its street railways it has
owned and operated for many years its
water works and an electric light and
power plant, both of which have been
very well managed and successful, and
its Port district has splendidly equipped
ocean terminals, warehouses, grain ele-
vators and cold storage plants, all pub-
licly owned and operated. The citizens
are proud of their municipal under-
takings, and when the question of
buying the street railways came up in
November, 1918, they voted for the
purchase by about three and a half to
one.
The deal was a hasty one and did
not allow time for a thoroughgoing
valuation of the property, but a valua-
tion by accountants of the Public
Service Commission, begun but not
completed, showed it to be worth in
the neighborhood of the purchase price,
and the city officials, in a statement to
the voters just previous to the election,
gave its value as $16,102,946. I am
inclined to beUeve that, considering the
state of the business at that time and
the growing difficulties in which trac-
tion interests all over the country
I
138 NATIONAL MUNICIPAL REVIEW SUPPLEMENT [Feb.
found themselves, the price paid was
too high, but I approve the judgment
of one member of the Seattle city coun-
cil, quoted as asserting that he could
not see that the lines exceed eight mil-
lions in value, but that he believed the
elimination of the traction company
from local affairs was worth the dif-
ference and he would vote for the pur-
chase. The price was probably lower
than any valuation which could have
been agreed upon as a basis for a serv-
ice-at-cost franchise.
1921]
COST VERSUS MUNICIPAL OWNERSHIP
1S9
THE COURSE OF MUNICIPAL OPERATION
IN SEATTLE
Had the railways remained in the
hands of their former owners, a raise in
fares was imminent, and fares had been
advanced in all other larger cities in
the state. The Seattle railways under
municipal ownership are burdened with
a heavy obligation of debt liquidation
which private ownership would not
have entailed, but the new manage-
ment, instead of raising rates at once,
allowed their optimism to get the bet-
ter of their judgment, asserting that
their new utility would meet its obU-
gations with a five-cent fare. Their
system is virtually capitaUzed at
$17,215,000, of which $16,440,000 is
represented by utility bonds which are
a first lien upon receipts, and not only
must they pay 5 per cent interest on
this sum, but they must also meet the
principal in a series of annual pay-
ments of $833,000, beginning March 1,
1921.
It soon became evident that in spite
of a number of economies, fares would
have to be advanced, and while this
subject was being discussed a munici-
pal election came on. The manage-
ment of the street railways was the
chief issue and the result was a change
of administration. The report of op-
eration issued at the close of 1919,
covering the first nine months of mu-
nicipal ownership, showed that with a
rather Uberal allowance for deprecia-
tion the lines had run behind $517,000.
The cash fare was raised to ten cents,^
with metal tokens sold on the cars at
four for a quarter. The mayor in
signing the ordinance said he believed
the advance was not suflScient. Wages
of carmen have advanced from 64 to 80
per cent over those paid in 1918, under
private ownership. The gross loss for
the first four months of 1920 including
depreciation, was $468,000. There are
rumors afloat that illegitimate means
were used to influence the sale and the
city council, at the request of the new
mayor, has voted $10,000 as a fund for
probing the transaction.
It is too soon to make a reasonable
forecast of the outcome of Seattle's
latest experiment in municipal owner-
ship. Inadequate financing was forced
upon the city by reason of constitu-
tional debt Umitation. It must pay for
its purchase in eighteen years and at
the same time build up a depreciation
reserve of over twelve millions, thus
placing an enormous burden upon its
street car patrons in this generation in
order to turn over to the citizens of
twenty years hence a street railway
fully paid for and adequately main-
tained. It is a feat which no private
company would undertake. A service-
at-cost franchise would have called
only for the payment of operation,
depreciation and interest, and unless
there is careful management the fares
may be higher during this twenty-year
period than they might have been un-
der service at cost. Seattle has not an
ideal form of government for carrying
on the business of utility management,
yet its pubUcly owned water-works
and electric light and power plant have
been efl&ciently managed, and the high-
class men who are at their heads as
superintendents, have been there many
,1
years, through many changing political
administrations. The civic spirit in
Seattle is high and I believe that public
ownership has a better opportunity
there than in many cities which have
more modern forms of government.
CAN PUBLIC OPERATION BE EFFICIENT?
We are inclined to base our judg-
ment on public ownership upon the
presumption that privately owned
utilities are always well managed, and
that the reverse is true of all municipal
undertakings. That this is a fallacy
any intelligent student who is open-
minded will aflfirm. Many of the mu-
nicipally owned utilities have passed
through this post-war period without
asking for rate increases and are sol-
vent. I know of no city which has
owned and operated any utility for ten
years or more, in which there has not
been a great saving to its people by
reason of reduced rates, not only for its
own service, but by reason of its com-
petition with privately owned utilities
which have thereby been induced to
reduce their rates. Municipal owner-
ship is not often credited with any
advantage for this reason, and yet I
can name cities in which pubUc owner-
ship would have been of the greatest
advantage even if the publicly owned
plant had never turned a wheel. The
tendency in municipal plants is to pay
off and cancel funded debt obligations;
that of privately owned plants is to in-
crease them. Under municipal owner-
ship the chief incentive of operation is
to give service; imder private owner-
ship it is to make profits. The tend-
ency imder private ownership is to a
brand of political activity that, in my
opinion, is infinitely worse than any
"politics" that may creep into man-
agement under public ownership. The
people in every city in the state of
Washington will be heartily thankful
for any curtailment of the evil political
domination of the state legislature by
the former Seattle traction interests
which results from mimicipal owner-
ship in that fine city.
It is my firm opinion that service at
cost is a transition state, a temporary
expedient, and one which will be in the
long run unsatisfactory to both the
owners of street railways and the pub-
lic. To the owners, it will be just a
tightening of the chain of public r^u-
lation which curtails more and more
their freedom of operation, but it will
be sought in order to fix a value which
may form a basis for public purchase
later. The voters will ultimately
awaken to the necessity of a better
form of city government, in which the
officials have more authority and more
responsibility, and of a more lively in-
terest in government on their own part,
and when these things have been ac-
complished, they will insist upon the
ownership of their public utilities and
their operation on the basis of the
greatest good to the greatest number,
and the banishment from municipal
life of those evil forces, which have
done so much to corrupt city govern-
ment in America.
-f
I
TECHNICAL SUPPLEMENTS of the
National Municipal Review
1. The Assessment of Real Estate 24 pages
• By LAWSON PURDY
For eleven years President, Dept, of Taxes and Assessments,
City of New York
2. Administrative Consolidation in State Governments
By A. E. BUCK 32 pages
New York Bureau of Municipal Research
3. The Coming of Centralized Purchasing in State
Governments 24 pages
By A. E. BUCK
New York Bureau of Municipal Research
4. A Correct Public Policy Toward the Street Railway^
Problem 24 pages
A Report of the National Municipal League Committee on Public
UtiUUes.
t
5. Zoning 32 pages
By EDWARD M. BASSETT
Counsel of Zoning Committee of the City of New York; former
Chairman of Districting Commission of the City of New York
6. Employment Standardization in the Public Service
By WILLIAM C. BEYER 16 pages
Assistant Director, Bureau of Municipal Research of Philadelphia
7. The Presidential Primary
By RALPH S. BOOTS
Columbia University
8. The Law of the City Plan
By FRANK B. WILLIAMS
Counsel for American City Consultants
24 pages
30 pages
9. Administrative Reorganization in Illinois
By JOHN M. MATHEWS 20 pages
University of Illinois
Prices of any of these supplements: Single copies, 25 cents
5 copies, $1.00 25 copies, $4.00 100 copies, $15
NATIONAL MUNICIPAL LEAGUE
261 Broadway
NEW YORK, N. Y.
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Service at cost for street railways i'
a synposium, four papers by experi-
enced public officials... .
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