BUSINESS--A PROFESSION Chapter 9

HOW BOSTON SOLVED THE GAS PROBLEM

Published in American Review of Reviews, November, 1907

Shall the public utilities be owned by the public?—is a question pressing for decision in nearly every American city.

To aid in its proper solution the National Civic Federation began about two years ago a comprehensive investigation of representative American and British gas, water, electric light and street railway plants, with a view to comparing the advantages and disadvantages of private and public ownership. The opinions of the experts upon the data so collected appear to be widely divergent and to indicate, so far as they can be reconciled at all, that neither private nor public ownership, as ordinarily practiced, is wholly satisfactory.

While this investigation was proceeding, Massachusetts entered, in connection with the Boston gas supply, upon an experiment, new in America, which may lead to the best practical solution of the public-utilities problem. The new Boston system creates substantially a partnership between the public and the stockholders of the gas company—a partnership in which the public will secure an ever-increasing share of the profits of the business.

This system has already given to Boston eighty-cent gas, although Boston is located many hundred miles from the mines which supply its coal. Eighty cents is a lower price for gas than is actually enjoyed by any other city in the United States, except a few within the coal and oil region, like Cleveland or Wheeling, and Redlands and Santa Ana, Cal. Even in those cities the price is not lower than seventy-five cents—a price which Boston may reasonably expect to attain soon. For, during the two years ending July 1,1907, four reductions in price each of five cents have been made. To have reduced the price of gas twenty per cent during that period of generally rising prices in labor and materials is certainly a notable achievement. The most recent reductions in price were the wholly voluntary acts of the company, made under wise laws framed in the interest both of the public and of the stockholders. The saving to the gas consumer by these reductions was in the first year $265,404.55, in the second year $565,725.60, and will be in the third (the current) year about $800,000.

That this saving to the consumer was not attained by a sacrifice of the interests of the stockholder may be inferred from the market price of the stock of the association which controls the gas company. In the two years following the legislation of 1905, a period in which most other stocks depreciated largely, the common stock of the Massachusetts Gas Companies rose from 44 1/2 to 57 1/2; and even in the severe stock depression of September, 1907, this stock was firm at 52.

Compare with the results of the Boston experiment the attempt in New York City made at about the same time to reduce the price of gas from one dollar to eighty cents by legislative fiat and the compulsory orders of the State commission. The New York company contended that the law was unconstitutional; the federal court issued an injunction; the consumer still pays out one dollar for each one thousand feet of gas; and the market price of the stock of the Consolidated Gas Company of New York fell during the same period of two years from 200 to 118, and in September, 1907, to 96 ¾.

But Boston has reaped from the sliding-scale system as applied under President Richards' administration of the company far more than cheaper gas and higher security values. It has been proved that a public-service corporation may be managed with political honesty, and yet successfully, and that its head may become a valuable public servant. The officers and employees of the gas company now devote themselves strictly to the business of making and distributing gas, instead of dissipating their abilities, as heretofore, in lobbying and political intrigue. As a result, gas properties which throughout the greater part of twenty years had been the subject of financial and political scandals, developing ultimately bitter hostility on the part of the people, are now conducted in a manner so honorable as to deserve and to secure the highest public commendation.

The passage of the Sliding Scale Act of 1906 marked the close of the campaign upon which the Public Franchise League entered in 1903. All Massachusetts gas companies had since 1885 been subject to the supervision of a State commission with very broad powers, including that of fixing prices. New securities could be issued only with the commission's approval. For many years stringent laws prohibiting stock-watering had been in force. While these laws are of great value and have protected Massachusetts from many of the evils of corporate management from which other States have suffered, dissatisfaction with conditions from time to time prevailing in connection with the Boston gas supply was persistent and well founded. Boston tried successively "regulated" monopoly, competition and the combination of gas companies. The service was poor and the management unprogressive. The price of gas, which after a strenuous contest had been reduced in parts of Boston to one dollar in 1893, appeared to be immutable.

The application to the legislature made in 1903 for leave to consolidate the several Boston companies then in combination afforded the Public Franchise League its opportunity. Several minor provisions were inserted in the consolidation act designed to protect the people's rights, and the issue of capital by the united company was limited to the net "fair value of the plants and property of the several corporations as the same shall be determined" by the gas and electric light commissioners, "without enhancement on account of the value of franchises or earning capacity or on account of exclusive privileges derived from rights in the public streets."

The aggregate outstanding securities of the constituent companies had a par value of only $15,124,121 (of which $9,309,600 was stock and $5,814,521 funded debt). But when, in 1904, application was made under the act to fix the capital, the companies claimed that the properties had recently cost the then owners over $24,000,000, that their replacement value was about the same amount, and that the fair value for capitalization should be not less than $20,609,989.99. The Public Franchise League, on the other hand, contended that substantially any excess in value over the $15,124,121 represented not contributions by stockholders, but accumulations from excessive payments exacted from gas consumers; that in the reorganization of the business such value should not be capitalized; and that the Consolidated Company's capital stock should therefore be limited to the aggregate of the capital of the constituent companies then outstanding, plus such additional amount o£ stock as it might be necessary to issue at its estimated market value (which was above the par value) to provide funds for paying off all existing indebtedness. The league deemed the retention of the original capital so augmented of fundamental importance, mainly because the payment of a high rate of dividend on a small capital issue would tend to keep the public vigilant.

After a long and bitter struggle the gas companies, acting under the enlightened and able leadership of Mr. Richards, agreed, in 1905, with the Public Franchise League upon legislation which provided that the capital of the consolidated company should be limited to the aggregate par value of the outstanding stock and funded indebtedness of the constituent companies, to wit: $15,124,000; that the maximum price of gas in Boston should be reduced to ninety cents within twelve months after the consolidation was effected; and that the governor should appoint a commission to consider and report to the next legislature whether the adoption in Boston of the so-called London sliding scale system for "the automatic and interdependent adjustment of the price of gas to consumers and the rate of dividends to stockholders of gas companies" was expedient. The favorable recommendation of the minority of this commission, Messrs. James E. Cotter and Charles P. Hall, was supported by the Public Franchise League and the gas company, and on May 26, 1906, the Sliding Scale Act received Governor Guild's approval in spite of the strenuous opposition of both conservatives and radicals.

The Boston Sliding Scale Act, which embodies with some modifications the main provisions of the system widely used in England, provides as follows:

First. Ninety cents per thousand feet of gas (that is, the maximum price then actually charged by the Boston company) is made the "standard price" of gas.

Second. Seven per cent (that is, one per cent less than the dividend which was then being paid by the Boston company) is made the "standard dividend."

Third. The company is prohibited from paying more than seven per cent dividend unless and until one year after it shall have reduced the price of gas below ninety cents, and then may increase its dividend at the rate of one per cent for every five cents reduction in the price of gas.

Fourth. New stock can be issued only with the consent of the Gas and Electric Light Commissioners, and must be sold at auction at such minimum price and under such other conditions as the Commissioners prescribe.

Fifth. Provision is made for determining annually, and publishing in detail in the newspapers, the cost of manufacturing and distributing gas.

Sixth. After the expiration of ten years, the Gas and Electric Light Commissioners may, upon petition, "lower or raise the standard price per thousand feet to such extent as may justly be required by reason of greater or less burden which may be imposed upon the company by reason of improved methods in the art of manufacture, by reason of changes in prices of materials and labor, or by reason of changes in other conditions affecting the general cost of manufacture or distribution of gas."

A seven per cent dividend upon the capital of the consolidated company was equivalent to a return of about 4.35 per cent on the replacement value of the gas properties as testified to, and of their cost to the then owners. The "standard dividend," therefore, though nominally seven per cent, represented but a modest return upon the capital then recently invested, and was about $150,000 less than the aggregate amount then being paid by the several companies as return upon capital. Nevertheless strenuous opposition was made to the Sliding Scale bill on the ground that successive reductions in price would enable the gas company to pay very large dividends. The Public Franchise League recognized fully that after a few years' operation under the act much larger dividends would probably be paid than capital as capital is entitled to when employed in a business which is not only safe because it enjoys a substantial monopoly, but which also receives from the community without the payment of any compensation the license to lay and maintain its pipes in the public streets. The League insisted, however, that the proper aim of the public must be not to limit dividends, but to secure gas of good quality at low prices; that a limitation of dividends was desirable only when it conduced to that end; and that under proper conditions a reasonable assurance of the undisturbed enjoyment of large dividends might be the best method of attaining cheap gas.

The League therefore urged that the possibility of a large return upon capital offered under the sliding scale system should be regarded merely as an incentive to securing for the gas business the kind of management most likely to produce and distribute gas at the lowest possible cost, and thus supply an essential prerequisite to cheap gas. Protection against corporate abuses demands for gas companies strict supervision and publicity. Fairness demands that proper compensation be made in some form for the use of our streets. But no self-sustaining system of supplying gas can give to the people cheap gas unless it rests upon high efficiency in management.

The gas business has many of the characteristics of both manufacturing and merchandizing. Like other manufacturing businesses, it produces an article for sale. The cost of its produce is dependent largely upon the character and condition of the plant; upon the extent to which labor and waste-saving devices are adopted; upon the skill with which raw materials and supplies are purchased and waste or residual products are disposed of; and whether the plant is operated to its full capacity.

To an even greater extent than in most mercantile businesses, the pro rata cost of distribution of gas is dependent upon large volume. The distributing plant requires an exceptionally large investment. But the mains or pipes are rarely used to their full capacity. The interest, depreciation and maintenance charges are the same whatever the volume of sales. The inspection of meter, and many other charges, increase but slightly with the increase of sales. The pro rata cost of distributing gas diminishes largely, therefore, with the increase in the quantity sold. But, as in most mercantile businesses, the quantity of gas which can be sold in any of our large cities is dependent mainly upon the skill, energy, initiative and intelligence with which the business is conducted. The demand for gas is not a fixed quantity. There is, undoubtedly, a minimum quantity which will be used under almost any conceivable circumstances. But limits can scarcely be set to the possible increase of its use in our large cities. Not only is there an ever-growing demand for intense artificial lighting of public places, stores and residences, but there is an almost limitless field now occupied by electric light, coal and oil, of which gas is the natural competitor. The limits of the use of gas in any city, therefore, will be set mainly by the skill, energy and initiative of those who manage the business and by the extent to which they appreciate the fact that increased use of gas will result from reduction in price, bettering of appliances and improving facilities.

A management possessing the requisite ability and skill for such a business and which would exercise the requisite vigilance and energy may be best secured by following those lines upon which the remarkable industrial advance of America has proceeded, the lines of intelligent self-interest. Those who manage our gas companies and other public-service corporations should be permitted, subject to the limitations stated above, to conduct the enterprise under the conditions which in ordinary business have proved a sufficient incentive to attract men of large ability, and to insure from them their utmost efforts for its advancement. These essential conditions are:

(a) The right to enjoy a fair share of the fruits of successful effort.

(b) The opportunity of devoting one's whole efforts to developing the business.

(c) The probability of pursuing for a reasonable time without interruption such business policy as may be adopted.

The Public Franchise League believed that the sliding scale system supplies in large measure these conditions essential to the successful conduct of our public services—conditions which are in no respect inconsistent with the restrictions demanded for a proper protection of the public interests. It believed also that the Boston company possessed in its president, Mr. Richards, a man of the character and ability required to make the sliding scale system a pronounced success. The results of the new law under his administration have happily confirmed the judgment of the League.

The rate of increase in savings to the gas consumer noted above—that is, from $265,404.55 in the first year to $800,000 (estimated) for the third year—is due in large measure to the rapid successive reductions in the price of gas; and, obviously, further reductions will come more slowly. But further reductions may be expected, both because of the growing efficiency of the management, and the rapidly increasing consumption of gas.

The efficiency of the management is being promoted largely through the voluntary extension by the company of the sliding scale principle to its employees. Under this wise provision 681 employees receive, in addition to regular wages, a dividend on their wages, at the same rate as the dividend on capital stock paid to stockholders. And these 681 employees have either already become stockholders, or under the operation of the system will soon be such.

Even without further reductions in price, some increase in the saving to the people may be expected each year. For it is one of the great merits of the sliding scale system that while, upon reduction in price, the increased dividend is figured from year to year upon the same or substantially the same capital, the saving in price is practically certain to be figured upon an ever-increasing quantity sold. The reduction in price increases sales; and the increase of sales renders further reductions in price possible. The sales of the Boston company to consumers in the year ending June 30, 1907, were 23.73 per cent greater than in the year ending June 30, 1905—the first reduction in price having been made as of July 1, 1905. The sales from July 1, 1907 (when the price was reduced to eighty cents), to October 1, 1907, were 16.6 per cent greater than that of the corresponding period of the preceding year. It is expected that the company will this year increase its dividend rate one per cent, calling for an additional payment to stockholders of $151,240; but the people will save in the current year (as compared with the standard price of ninety-cent gas) about $400,000. When the eighty-cent rate shall have been in force twelve months the company may increase its dividends, if earned, by another one per cent. But it cannot be so earned without a further increase in consumption of gas, which in turn must result in further reduction of cost and further increase of the amount saved by the people. The experience of the English companies under the sliding scale system shows that while, at the outset, the saving to the community and the amount paid on the increase of dividend were about equal, after a series of years the savings to the consumer were from three to seven times as great as the increase of dividends to stockholders.

If the demand for municipal ownership in America can be stayed, it will be by such wise legislation as the Public Franchise League has promoted and by such public service as Mr. Richards and his associates are rendering in the management of a private corporation.

Go to next chapter.

Return to the table of contents.