Amazing articles on just about every subject...

Concerning War-Time Extensions—Some Underlying Principles

( Originally Published Early 1900's )

I TAKE it that this audience will accept my first premise, to wit, that war is abnormal and that business conditions. which result from it, and which may be expected to cease and determine more or less promptly upon the arrival of peace, are likewise abnormal.

Neither do I think you will challenge my second premise, to wit, that public utilities must be planned, financed and operated as continuing services; subject to slow changes in quality and character; subject to changes of ownership either gradually by transfers of individual holdings or comprehensively by sales, mergers, etc.; but forbidden, alike by law and by public necessity, from ceasing to function; and that a consistent and continuous business policy is therefore required of, and by, them.

My third premise has been so frequently announced and enforced by commissions and courts that I need only state it. It is, that in fixing rates or determining values, of public utilities, credit will not be given to the utility for

(a) Excessive or premature investments

(b) Abnormal price paid for capital

(c) High costs resultant from grave errors of judgment

There was, indeed, during the years immediately preceding the war, a strong drift in the pronouncements of courts and commissions, towards requiring of the management of public utilities an' infallibility in anticipating the requirements of their territory, and an omnipotence in commandeering capital, and a freedom from error in plan or execution, which are not to be found united in any mortal man, or in any group of men.

My fourth premise is that some day, please God, the technical and financial stresses of these war years, which today are making some of us old before our time, will be but dim memories or be for-gotten. It will be well if we can then look back and say truly that all things have worked together for good. But we may depend upon it that among those whose memory will be most blank, will be these same commissions, which before the war seemed to expect of us both counsel of perfection, and superhuman execution.

To illustrate my meaning. One would think that the money panic of 1907 would not have passed out of the public recollection, and certainly that it would not have passed out of the instant remembrance of those commissioned by the public to consider public utility matters. Nevertheless I have found myself more than once obliged to explain why certain securities which in normal years have brought prices near par should have sold in the lower 80's, during the autumn days of 1907. Some of us will likewise, within ten years after peace is declared, have to remind official inquirers that short-time notes could not be marketed in 1917 and 1918 on a 6 per cent basis and that long-time bonds could not during many months be marketed at all.

Let me condense my four premises into four short phrases as follows:

(1) War conditions are abnormal

(2) Public utility business will continue after abnormal conditions have ceased

(3) The public, through commissions and courts, demanded, in normal times before the war, that public utilities should have been managed and financed with extraordinary skill and capacity

(4) On the return of normal times we may expect that the demands of former normal times will again be made upon us

Construction Expenditures Under Abnormal Conditions

Please now consider any construction expenditures which we may make or propose to make during the war period. If, indeed, our consideration is not forthwith ended by the evident impossibility of doing anything, we will see, first, that the return for any expenditure in the present market will be abnormally small; that is to say, that any thing or service which the public utility is likely to purchase during these war-times, will cost in money from one and a half to two times the average price of the five years preceding the war. Secondly, we will see that the money which must be raised to pay for the thing or the service will likewise cost us from one and a half to two times the normal price for money. It follows that the least cost of capital for any net result will be two and a quarter times normal, and in the extreme case of "double cost of money, times, double cost of construction," it will be four times normal. The moral is obvious.

Let us forget for a minute the unreasonableness of requiring that public utility management be superhumanly wise and powerful; and let us accept the underlying truth that each of us is called on to consider and wisely guard the permanent interests of the community which he serves. He must not let his optimism burden that community with an overdeveloped plant, neither must he lag behind the growth of the community and delay meeting its needs until these become clamorous. The problem which he must solve, in normal and in abnormal times alike, as to every proposed extension of his service, is whether that extension is one which will continue to be used and useful. If it is obviously temporary, every commission and court will uphold him in refusing to make the extension unless the return of its entire cost is guaranteed during the period of its use. The theory of that refusal is that the future service of a community should not be burdened with the capital costs of a past temporary need or use; but that each service should, during its own life, pay its own total costs. This economic rule may be concealed by a franchise or contract clause under which the utility is compelled to give service to any applicant within a certain area; the theory thereof being that the interest of all inhabitants of that area, should, with reference to this particular service, be consolidated or pooled for the common good. That theory is, of course, the fundamental theory of every organization having territorial limits, whether it be village, city, state, or nation. But the economic rule is not nullified thereby, and in these times it simply must be recognized.

Local vs. National Interests

This leads to the consideration of our local territorial interests, as against the interests of the greater territorial community—in the present instance the interest of city, or other service district, as against the Nation. If anything has been made clear by the discussions, and proclamations, and laws, and taxes of the last twelve months, it is that the war is a national affair and the distribution of the duties and costs of the war, pro rata among the lesser territorial communities, is to be made by the Nation according to rules and methods existent in our constitution and laws before the war, or newly established for the special occasions of this war. Without volunteering any opinion as to whether the incidence of taxation, or of the selective draft, upon one community or another, is as just as it might be, I submit that there is no dispute that the total costs of producing war materials is intended to be paid for out of national funds raised by national taxes or bond issues, and that no community is required, or even invited, to tax itself specially for the purpose of producing or aiding in the production of munitions.

The Government's Share of Costs

Now to consider the special case of extensions of our lines or of additions to our plants for the purpose of furnishing electric service to munitions making establishments—whether these establishments be owned or operated by the Government or by firms working under Government contracts. It appears from the premises that to make these extensions under present conditions will entail capital costs from two and a quarter to four times normal. This condition will not be changed by any possibility of using the extensions or additions for peaceful purposes after the war. It is also reasonably certain that there will be, immediately following the war, a period when these extensions or additions will be only partially used and useful, or it may be that they will be absolutely idle. Moreover, no wise management, even if it were assured that in the year of grace, 1921, and thereafter, it would be able to find employment for an additional turbo-generator or for an extension of conduits and cables, would undertake to go into the present market for the material or for the money to make that extension. To do so would only be to provoke condemnation in some future rate making or valuation case, for incurring excess cost of capital and for making premature developments and for gross error of judgment. Remembering that our decisions made in haste in these abnormal times, will certainly be examined at leisure by the duly ordained authorities some time in the future, we are, I hold, just in insisting that we be protected against adjudication of fault in these three respects. Let us consider the three in sequence.

Excess Cost of Capital. The present extraordinary cost of capital to provide a given service, to wit, the difference between normal cost and the two and a quarter to four times normal cost now ruling, for the useful value of the purchase, should be held to be a part of the cost of the proposed production of munitions and should be forthwith and finally paid by the Government, as part of that cost. Notice the finality of the payment. A certain legal gentleman who has been studying the question on behalf of one branch of the United States Government, has arrived at the conclusion that this excessive cost should be advanced to the utility by the Government—or by the Government contractor who would of course recover it from the Government—but that the utility should repay this extraordinary cost of capital, in installments, and after peace is declared. It does not matter how the utility might ultimately finance such a repayment—whether by capitalizing it or by amortizing it—the payment of this excess cost by the utility would be to impose upon its community more than a just share of the cost of making that particular lot of munitions. And it is neither the right nor the intent of the Nation to burden any community with more than its just share of any national expenditure. As public utility managers it is our duty to see that our particular community does not become so burdened, through laches on our part.

Premature Developments. After the excess cost has been paid by the national Government, and presumably amortized over the munitions output of that factory, the question remains as to whether the extensions will continue to be useful to the local community. This is a matter of evidence and of judgment—a question for a jury rather than for a court. I do not see any solution other than the peace-time one, that the responsibility for making or denying any extension must be accepted by the public utility management—unless, of course, that utility management can "pass the buck" to the municipality or other territorial unit which it serves. I use the slangy words intentionally. We all of us know communities that insist on unwise expenditures and then complain of the consequences. Witness the unreasonable undergrounding of lines which has been called for in many cities. But most communities will back up a utility in a wise protest against avoidable costs of service.

Grave Error of Judgment. This is the least simple proposition of the three. In a broad way, I question whether certain electric power extensions made or proposed are wise even as aids in winning the war; but the decision to make or not to make these extensions does not lie with us, but with the national Government, and their wisdom must be left to be proven or disproved by history. Contrariwise, and in an equally broad way, I believe that many electrical developments which have been encouraged by the war—such as the rapid increase in number of electric furnaces for metal working—are eminently wise and are but little ahead of peace-time progress of the art. Speaking to our own public utility case, I doubt whether some communities have done well in reaching out for certain war contracts. These communities, some of them small, will inevitably suffer a serious recession when peace arrives. The reverse of this case is the wisdom shown in a few large communities which, by concerted action of the manufacturers and bankers and leading citizens of other index markings, have been systematically transferring their peace-time manufacturing abilities over to the production of war materials, and are adding little or nothing more to their present factory capacity than would be warranted by their growth in normal times. In the one case, an overdeveloped public utility whose management has erred in judgment by not protecting itself against the inevitable slump, will certainly be subject to criticism hereafter. In the other case, the public utility may expect, with its community, to be very little disturbed by either change—the change to abnormal war conditions or the change back again. Good judgment, therefore, will dictate widely different policies in different cases; ranging from insistence that the Nation shall carry the entire cost of the extensions, with no obligation whatever on the utility to take these over even at a depreciated value, all the way to the other extreme, where good judgment may decide on the assumption of the entire cost of the extensions actually needed. But if there be any extension large enough to require the issue of securities, the abnormal cost thereof should not be assumed; the normal cost being the maximum burden acceptable by the community.

To sum up, the minimum contribution which should be made by the Nation, as part of the cost of war, towards expenditures for public utility extensions or additions to be made for war purposes, is the abnormal cost of the extension, in terms of the cost of new capital required to produce the same. From that minimum, the contribution to be made by the Nation may range upward to the entire cost in the case where the extension or addition is made for some extraordinary and temporary purpose; such as, for instance, the production of nitrates from air by electricity generated by steam power. Between these limits the utility management must exercise its judgment. The penalty for error of judgment may be severe, therefore it is well to play somewhat safe.

Consideration of Collateral Subjects

There are any number of collateral or interlocked subjects which might be discussed without departing too far from my text. For instance, whether the Government contribution should be collected as part of a special rate for service instead of as a direct contribution. I think it should not. I think the Government share should be an unqualified contribution, not disguised as a part of the price for service. Then there is the question as to whether the Government should pay an estimated amount based upon assumptions of cost, and agreed upon beforehand; or whether it should pay the actual sworn costs, less average costs of, say, the preceding five years—taking price of money in as a cost, of course. The latter is the better way if it is clearly specified in advance. It avoids any possible accusation of graft. Again, it is a question as to whether supplies or equipment diverted to Government uses should be charged for at their actual cost to the utility, or at the replacement cost, or should in fact be replaced by the Government by identical sup-plies or equipment at some later date. The answer to this latter question should be influenced by the old adage that short accounts make long friends. Better let something go at cost and be paid for quickly and done with it, than have an argument about market costs in a market bedeviled by so-called Government prices, or find ourselves waiting for replacements which will probably be commandeered three times ad interim. Also there is the question as to how the excess cost of capital at the present time shall be determined and, when it has been determined, how it shall be multi-plied into the excess cost of material to give, as a product, the proper amount of a Government contribution. These utilities that have been awarded a certain rate of return on actual investment may apply as a multiplier the relative annuity value of the present high cost of money. Those utilities who have not such an official datum line, may take the normal, or five-year, market price of their securities as a multiplier and the present market price of these securities as a divisor. These be details, important only because in dealings with the United States Government it behooves us at all times to be above reproach, even in trifles.

Public Utilities as Trustees for Communities

This audience knows that our membership, both corporate and individual, has from the beginning of the war served the Government gladly in small matters and in great—that we have met every call, whether to sell Thrift Stamps or to donate the services of highly'skilled and highly paid engineers and executives or to release our best employes to special military and naval duties. But, lest the printed record should come under the notice of some critic ignorant of our attitude, I now say that we have given willingly of our own and that we expect to continue giving. But we are not free to give that which is not our own; and that is exactly what we shall be doing, if in exuberance of patriotism, or in failure to perceive the equities, we shall burden our future service to our communities with an undue share of the present costs of war. We are, in effect, trustees for our communities; and this talk is a reminder of the terms and limits of our trusteeship.

Home | More Articles | Email: