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Economics and the Engineer in Utility Management

( Originally Published Early 1900's )

YOUR presiding officer has indicated to you just what he wants you to believe he wanted me to say. In other words, he has shown the wisdom which I would have looked for in the Legal Department, rather than in the Technical Department, of setting up an alibi in advance.

He has not indicated to you that while my subject is "Economics and the Engineer," I am directly and indirectly asked to say how the engineer in general, and how the Technical Section in particular, look to the executive group. Now, I rather repudiate responsibility for the ideas of the executive group as a whole. Its characteristic is its great divergence, its great spread in ideas, but I will say that in speaking I will try to confine myself to those expressions which I think might have a majority vote if the executives with whom you as engineers have to deal, were compelled to bring the matter to a vote, and not to kill the discussion, as is done in another place (to use parliamentary language) by overmuch talk.

These executives think the Technical Section is a pretty good thing. It is more than a pretty good thing. It has been suggested, in the course of your proceedings here, to some extent in print and to a greater extent in the spoken remarks, that possibly the executive thought that Technical Section meetings were of the nature, at times, of joy rides. Well, we don't think so. I say that flatly. If we did, we would do what we do with joy rides in other lines,—stop the doings by cutting off the appropriation. I think you can take it for granted that while it is marvelously unsafe to carry any activity to the point where an impatient executive says, "That's all right, but you can't spend any more money," because you already have in that case gone too far, yet you may take it for granted, and fully granted, granted in the spirit as well as in the letter, that if the executives who are responsible for the expenditures of the funds of the companies in this Association did not believe that the activities of the Section, including its Section meetings and its committee and subcommittee meetings and so on ad infinitum, were showing a fair result for the expenditure, the expenditure would somehow or other get shut off.

Let me warn you, it is not good to run that sort of thing up to the point of inviting shutting off, but so long as you do not hear the preliminary grumblings of the financial storm, you may conclude that the weather is fairly good, and go to it, and God bless you!

The Last Drop of Molasses

I do not know that all the activities of the Section just fairly impress those of us who are responsible for the economics of the industry, as being fully warranted. We think that some of them are (to use your own technical language, which please remember was once upon a time mine) excellent examples of the operation of the law of diminishing returns. To get into the vernacular, you are in some instances getting the last drop of molasses out of the jug, which is 100 per cent efficiency, but it is a dickens of a lot of scratching for mighty little molasses.

The remainder of this talk will run somewhat to discussion of how these activities of yours appear to one who still talks your language, as often as lawyers and bankers and other children of the devil will permit him, and still thinks your thoughts. I wish you would under-stand that I am talking among friends and to friends, and that there is nothing said that is personal or that need hurt anybody. We have a rule in my own service, which we have had for many years; it was an unwritten rule before it was put into print; that no man in the service could be reprimanded by letter, and not even by telephone. If he needed "cussing out," it had to be done face to face. And that rule is now a printed general order. The fact of it is that straight talk, even if the talker on one side has the advantage of a set of mega-phones and the position on the platform, is a very different thing from a written official wigging with six carbon copies in different files. If anybody feels that he is getting called down, please let him remember that the record of this will go only where such records go,—into the minutes of the Association, which no one was ever known to read.

Now I know I am taking chances. I suggested that I was asked to take chances in making such a talk, and I was told that my years and standing made me fairly safe. I don't like that reference to "years." It is getting too frequent entirely. There is too much consideration as a matter of fact, for that phase of my continuity of existence.

The Association, for instance, asked me to appear as a witness before the Interstate Commerce Commission late last year, and one of the attorneys for one of the appearing parties, in submitting his brief, felt called upon to quote my evidence in part, with approval, and he said, "Consider the testimony of the venerable Alex Dow."

I didn't know he had perpetrated that until I saw the brief in print, and that brief reached me at a time when I was more or less at peace with all mankind. Just about the time when I begin to feel ugly again, I am going to look in the dictionary for the right epithet to apply to that counsel, and I am going to wait for the chance to make it stick, because I resent being called "venerable."

I am not asking for consideration on account of age. I acknowledge fifty-one years of public utility service to be completed the tenth or eleventh of next month, but, as the lady said when she had to explain her great, tall sons, "I was married very young."

And the impression of age is not without compensations. For instance, Mr. T. I. Jones, whom a good many of you know, saw me out in the cold on the Boardwalk without an overcoat, and he promptly took off his own coat and wanted me to put it on. Why, good Lord, I'm not nearly dead yet!

And just the other day a very nice little lady, who I should say was about sixteen,—she would have been about sixteen when I was competent to judge the ladies' ages, before they got to all look alike —stood up in the subway, evidently at the instigation of her mother, and offered me her seat. Now, the answer that I finally gave her is pretty much the answer that I propose to give you. I first said, "Really, I can't take a seat from a lady!"

She still stood up and looked at her mother, and made a very pretty little courtesy, that she must have learned in a very good school, if she didn't get it from that Old World mother of hers, and she said, "Won't you take my-seat?"

I said, "Honey, I'm not nearly old enough to take your seat, but I am old enough to make you mind,—now you sit down!"

I think perhaps although I am not old enough for special consideration for age, I am old enough to make you mind, and that's why!

What we need now are executives with some engineering sense, or else engineers with some economic sense. I am aware that laws of economics are part of engineering courses at all well ordained schools, and some of the teachings are good, but they run too much to balancing possible returns from some technical expedient against the amortized costs thereof, including, of course, interest. Now, that isn't just the right way to look at it. The economics of our industry are much larger.

The Executive's Task

The executive, whoever it may be, either one person or a very small committee—and no large committee ever made a success of executive functions—must coordinate the moods and tenses and seasons and ideas of the stockholders who represent finance coming into the business, the bondholders and purchasers from whom he must get part of his money, the customers who must furnish the running expenses plus the return upon the investment; the staff who have ideas as to operation, and representation is made through them and by them, at times frequently, as to what can be done to better operation or what can be done to invest more capital; and the problem is to bring all these times and seasons and recommendations and possibilities together, so that his financing will be timely.

If I am shown, for instance, that a plant located at a certain place, going after a certain careful estimated business, will give a certain return on the invested capital, and that the whole calculation has a reasonable margin of safety, it doesn't follow at all that the money is right there. Money is just about as temperamental as any opera star; it has to be coaxed out some times, and other times you can't keep it from coming to you. Once in a while it just piles in on you. The difficulty then is to restrain yourself from using all the money that your investing public are willing to give you; to keep the brakes on and not start a career of extravagance, and, of course, if you feel that your term of office will be out at the next election and that the money is coming out of the taxpayers anyhow, you may spend it pretty freely and pretty carelessly—and that is what is the matter with executive action that doesn't carry executive responsibility in a continuing fashion. That is the real trouble back of the suggested management by 598 directors, of which you heard from a very competent Cabinet officer yesterday.

Now, the money has to stay in the business unless it can get out. We have to consider not only that the money can be coaxed in, but that the individual whose money is in it, can withdraw his money. You don't tell him, as you do in a gambling speculation that you know is a gambling speculation, to kiss his money good-by before he puts it in, because he may never see it again. You don't tell him as you do the two or three friends to whom you may go—usually they come to me-and say, "This is a good, sporty business; it looks like we might make a killing. Don't you want to come in for $100 or $1000?" It isn't like the case of the desert rat who comes to me once in a while in my spring vacation and says, "I know of a thing that looks like it might be a gold prospect. Will you grubstake me for about WO?" Each of these friends, whether the man who has a financial flier that he wants you to take, or the desert rat that knows he's got a gold mine if he's lucky, says "But kiss the money good-by before you put it in." I can't tell the people who are putting money in this business of yours and mine, "Kiss it good-by. You will have some fun when you get some returns, but you can't get your money out." They all want to know, "Is there a market for my share or my bond, if this thing doesn't go just the way I expect, or if I find it convenient to sell?"

The thing is evidently complicated; and that is only the beginning of the complications. The psychology of the money market is most peculiar. It is distinctly feminine—with all respect to the one lady present—in that you may live with it for a great many years, and you may guess ninety-five times out of a hundred what it is going to do, but you can't guess one time why it did it.

That is the problem in economics with which your executive has to deal. He knows, for instance, that it is not wise for him to go wool gathering after money to any person who has money to offer him; he knows it is not wise to trade too closely for money during times when money is offered for investment, because the people that he wants in this business are the people who collectively want to stay in it and are willing to keep on putting more money in it; who don't necessarily put their money in at the lowest price at the instant, but who over a term of years, in this continuing service of ours, can be relied upon to put the money in as it is needed.

The individual investor wants to know when and how he can take his money out, but collectively the kind of investors that we depend on are the people we know are willing to put it in and keep putting it in as the growth of the business requires. It is not always timely to go to these people. It takes a good deal of nerve at times, in fact, to postpone going to them when you know that they are not quite ready, but that the market for materials is so soft and the desire of contractors and labor for employment are so great that it is a good time to be building. An executive must then have nerve enough to borrow a few millions and go ahead with construction that he knows will be needed; borrow it in short time funds, with the intention of going to his own group a little bit later when they will probably feel better and be ready to put in the permanent financing.

Such a one has just the right kind of nerve for an executive, but he is taking a chance.

The most unpleasant thing that has ever happened, in my knowledge, to any of our executives has been to find themselves with a lot of short time obligations falling due and the money market, including their own particular group, running the wrong way. That possibility has got to be considered. Your executive has to look far ahead. And that is something that I would ask you to remember when a first-class project that you offer doesn't get the enthusiastic reception that you think it should get. Please at this time remember my telling you that we have troubles of our own.

I remember a certain nine-year-old with whom I was on very good terms, who turned her face up to me and said, "Why do you go to work—aren't you the boss?"

I said, "Yes, sweetheart, that's just why!"

We have troubles of our own, and while our "yes" and "no" may be to you the answers of an oracle, the answers of a supreme court of appeal, to us they mean "yes" for the moment, and I am thereby committed to it and I will see it through; or "no" for the moment, because the time is not seasonable. It is not that we feel any lack of confidence in the recommendation or the proposal; it most frequently is that the time, as I have said, is not timely.

Commercial Vision Needed

That necessity for vision, for looking ahead, for seeing what is going to happen, is imposed upon the executive not only in financial matters of that character but in the other question of what is going to be the commercial reaction from a proposed procedure.

Now, when you come to quoting instances, they should be modern, of course, but they need not be too modern or too personal. Let me call your attention to a well known case where, in my opinion and in the opinion of a great many others, an absolutely correct technical decision, finally arrived at by the consensus of the best consulting engineering ability in the world, was an exceedingly in-correct commercial decision.

I refer to the practice in Britain and in certain other continental sections, of using 200 volts for general lighting distribution. The problem, as it was laid before the consulting engineers and the technicians, and the answer as given back by them to their bankers and promotors and investors and their municipalities (in many cases) who found the money, was that the problem being to distribute so much electricity to the customer's terminals, then distribution at 200 volts as the final service voltage for lamps and appliances, gives the lowest total cost. Of all technical mistakes that have been made, I think that was the most fatal; not because the problem was not correctly stated and correctly solved, because the statement was correct as they saw it; the solution was correct as they saw it; but because they accepted the commercial handicap of inefficient lamps, relatively to the half voltage, under voltage lamp which we use; and the handicap of troublesome appliances. A household voltage of 200 and upwards required a superior insulation in a moist climate and made necessary all sorts of precautions, every one of which has delayed the introduction and free use of electricity in the household. They accepted that for lack of commercial vision. The inquiry was not (as it should have been) how to render electrical service to the largest possible extent and, thereafter, what is the best way to obtain that result; it was merely a set problem in electrical distribution, solved according to the principles laid down in Kelvin's law and the enlargements and modifications thereof.

Let's take another case and let's get out of the business for a moment. If ever there was honest engineering, honest and thorough technical discussion of the problem, it was given to the problems that come up in the United States reclamation developments. There was the water, and there was the land. The one thing that wasn't solved, that wasn't even properly studied, was whether the land would be used under the conditions that would result. There have been engineering mistakes, a few; there have been underestimates, a few; but the fact that a great many millions must be written off from the United States' account for reclamation work does not arise from engineering mistakes to anything like the same extent to which it arises from the fact that much of the land that was put under ditch, as the saying goes, has no present value in a market which is competitive. A great deal of land has been irrigated, which some day will grow crops, three or four generations hence, but only when all the better land is used up—and that is what is wrong.

Get my idea! The technical statement was correct; so much land, so much water. Problem : To get the water to the land. The answer was correct. The water was brought to the land. The engineering mistakes were few, in comparison to the total expenditures, and usually in the nature of rather optimistic estimates, which are common enough. And don't let us here for a minute imagine that we are free from that sort of thing. I don't know just how many hundred thousand dollars, or it might be into the millions, my own engineering education has cost my clients in these fifty-odd years, but it has been a lot.

The mistake was this: The commercial vision was not there. There was the land; there was the water; there was the combination duly made; but the crops that were raised on that land couldn't carry the cost of the project in the present market for crops, or in any market for crops of recent years, or likely to be ahead of us in early years.

Let's get a little nearer home, and let's maybe hit a sore spot. When the tungsten lamp—Mazda lamp, as we call it—came on the market, it was put forward as something that was going to give more light for the same current—a big reduction of cost. Under existing conditions, it was to give at least three times the light that could previously be had. It was left at that. It was developed along those lines. Its efficiency was pushed up to the point where it was over-refined. At the very same time the problem of lines to rural customers and lines to scattered residential districts was before us; that problem being one of distribution systems and transformers, in which the controlling factor was regulation. I do not recall that any technical group pointed out that the big problem to be solved in the industry at that time was the reaching of these customers and the giving of satisfactory lighting service, at less cost; and that voltage regulations was the controlling factor; and then that the tungsten lamp, with its reversed temperature characteristic, permitted of very much poorer regulations with acceptable light than did the old carbon lamp.

Let me remind you for the moment, that the old lamp had to be regulated closely because of its negative temperature coefficient. If it were overrun, it blackened quickly, and burnt out quickly, and the cost of lamps was much too high. The new lamp has just the reverse characteristic; its resistance rises with increase temperature; it is to a large extent self-protecting and to a limited extent self-regulating. Only a very few managers and not a single technician had the wit to see that the new lamp had this possibility.

We have come now to the place where there is a sharp reaction against such high lamp efficiencies, not because, under the conditions as they were accepted by the illuminating engineers, the proposed efficiencies were wrong; or if that were so, only to a limited extent from that cause—but because the conditions were such that the lamp itself can be run 5, 6 or 7 per cent low and still give decent light. That characteristic is now being recognized as of great value in the industry when the distances to be covered are great and when the complete cost of the circuits is almost a function proportional to the regulations.

Now, after submitting these three cases where the technical mind didn't see the whole picture—that is, cases where one way or another, financial, commercial, semitechnical even, the technical mind didn't see what the executive would be by force compelled to see —let me now say to this group, you are part of a great operating organization. You build your building as a preliminary to operation. You are not building plants for sale, to get rid of them and kiss them good-by. You are building plants that you or your confreres expect to operate. Your responsibility then lies in the operating conditions, and these tie completely into commercial conditions. Your function, then, as the Technical Section of an industry, is first of all to co-ordinate all the electrical and mechanical and civil engineering conditions; get them all together—not have the electrical side in its own little watertight and airtight compartment, and the mechanical side having a good time with entropy diagrams and reheaters, and the civil side fussing about foundations and building buildings for you that cramp you so you can't get out a rotor without knocking out the wall. You want to get them all together in this Section; you want to show them the picture of the technical questions coordinated as a whole, and you want, I think, to leave to the several technical societies the discussions of the more technical parts that do not need to be coordinated.

Consider the question of low power factor for a moment. Right there, there has been a lack of contact between the different engineering sides of our industry; and this condition would have been avoided, or at least it would have been anticipated and prepared for to a considerable extent, had there been coordination between the sides responsible for the selling of motors to customers; the sides responsible for the provision of the voltage regulation requirements of our generators, and the sides responsible for the selection of distribution methods. The worst cases of power factor trouble that I know have evidently come from the fact that one division and another didn't get together, and right there lies for this Technical Section its great opportunity, that I feel is not entirely being taken advantage of. It seems to me that there is too much separation, too much differentiation, too much going into this, that or the other detail, too much study at times of matters that might be well left to the Institute or to the Mechanical Engineers, too much attention to details that need not be embodied in your reports because they are matters of common knowledge, and too little coordination of all these things into the needs of the industry.

Too Much Printing

I need not go into instances too strongly with you, but in looking over printed matter that has come through my hands, either in advance copy or in reports or as preliminaries to the getting out of handbooks, to me, as an executive, it has seemed that some of you good people put a tremendous lot of work on matters that might have been left out of print. There seems to be too much printing. For instance, I hardly think it is necessary to spread out a diagram, full length, full size, of a McIntyre joint; I hardly think it is necessary to print a first-class line drawing of a standard bolt; I hardly think it is necessary to get into 30 or 40 pages, if I remember rightly, the electrical calculations necessary for the building of a transmission line. To me it seems that all of that line calculation is in the text books or in the Proceedings of the A.I.E.E.; that a record of the important formulas, and a very short tabulation of instances to illustrate the principles, would have been adequate. Those companies that are building important transmission lines have the people on hand, or can get them, to make the calculations. Those that aren't (being the great majority of the membership) will just figure that this is so much technical stuff that they are getting which is of no earthly use to them. I would suggest that it is wasted effort.

The work that is done is magnificent; the textbooks and hand-books that have been gotten out are magnificent; they are needed when they are strictly a handbook for the industry, like the Electrical Meter Men's Handbook. Too much cannot be said in compliment, too much credit cannot be given to the men who have worked these things into a practical form, intelligible to the class of workmen which we have to employ. But when you attempt to present a complete resume of the art of electrical transmission, starting from the pole digging and getting right up to the last advance calculation of drop in the transmission, you are covering ground that will be much better left to other organizations.

When the committees of this Section so far separate their work that they don't have time to get together as a whole and discuss, viva coca, in good, hot discussion across the floor, the board problems that come up and that bother us and that need discussion from all kinds of engineers and all subdivisions of the Technical Section—when we don't have time to do that, then we are missing our biggest opportunity for usefulness.

I sit in at an operating council of a certain organization and our rule is to dump on the table there any problem that doesn't seem to meet its obvious solution in the hands of the one department or of the two or three departments which may be concerned, and to ask (if that problem does not get a quick solution) the opinion of every-body present. It is a little bit funny sometimes to ask the legal gentleman at the end of the table for his opinion about a purely technical problem, but when you make him come through with his opinion or fine him 50 cents if he doesn't come through with it, you compel him to understand the other sides of the business.

In a lesser degree, because the extremes are less, the function of this Technical Section should be, I believe, to get the opinion of the electrical man on the steam man's puzzles, to get the opinion of the distribution man on the commercial man's puzzles. The commercial engineer is with you; the sales engineer is certainly among you, I know; and the illuminating engineer, who has recently differentiated himself and got his own piece of sulphur and his own box of matches and started his own little hell, is very much with you. If you would all get together in this Section and leave to the Illuminating Society, to the Institute, to the Mechanical Engineers, to the Civils, the discussion of the things that purely belong to them, and make your business the bringing of the minds trained in each of those lines to the general problems of the industry, you will have fulfilled your f unction and you will have merited the high approval of the executive.

I speak to you as an engineer who is an executive by force of circumstances. I mean it when I say that I would far rather be puzzling out some engineering problems than sitting at my desk and ruling upon a hundred things; saying "aye" and "nay," and sometimes so much pressed by the necessity of making a decision that I am suspected of feeling in my pocket to see whether it is a quarter or a dime that I have got hold of, and making the answer accordingly.

You will remember that a good executive, as defined by Elbert Hubbard and by many philosophers clear back into the beginning of time, is a man who decides quickly and is sometimes right. I would much rather settle down to fighting nothing but the total depravity of inanimate things, as most of you have to fight. I would then be just as cocksure about my results as some of you are, and I wouldn't have this suspicious frame of mind that causes me to wonder whether that or the other project will ever come out; never questioning the correctness of the calculation, but just wondering whether it will go, whether it will be a success or whether it will be a drag on the industry. I am never so happy as when I find in an engineer the executive turn of mind, and I am able to put in his hands some executive problem, and I am able to say to him, "Go on and puzzle that out; apply anything you have got, except the slide rule; work out your own judgment on it; go think about it; sleep on it; say your prayers on it if you want to; but bring me some kind of a practical recommendation that isn't technical—and I don't want a report with it either; I just want the recommendation." I am never so happy as when I can do that. My own closest associates and closest assistants are just the extreme ends of the useful line. One is a man, engineer trained, who has executive ability and has shown it, and whom I encouraged once upon a time to take himself, not exactly into the wilderness, but into a town of the Main Street class, and learn there the things that he never would have learned had he stayed in the engineering division of a big company. The other is a woman, whom many of you have listened to, who has grown up in constant touch with customers; and who emphatically denies any engineering knowledge, but who has (by the grace of God, I guess) a certain amount of engineering sense and the ability to look for engineering information in the place where it should be found. Looking back, I know I wouldn't have been happy in any other combination of immediate assistants. I have been just in the same position in that respect as every other executive. I want the engineer who has got some horse sense about business, and I want the commercial man who can get an engineering idea into his head and won't be ever-lastingly wanting to play a hunch.

Gentlemen, I have said my say; I wish you all kinds of good luck. You are about as good a bunch of boys as I have ever met. Some of you have gotten over being boys and look as old as I am. And I only trust that when you are as old as I am and get credit for being venerable, that you will be able to say then, as I do now, that your heart is still that of an engineer; that being an engineer, you can't be dishonest with anybody because you have dealt all your life with forces that compel you to be honest; that your thoughts are straight-forward because you have been taught to analyze; but that back of all that you have the imagination and the ability to decide, without carrying it into too many refinements—and that is the makings of a good executive.

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