order to determine the reasonableness of the zone system, the commission analyzed the income account for a period of years upon this basis, and commenting thereon, stated in general — that while it is undoubtedly true that the relative increase in population at the outskirts of the city will increase the amount of long haul traffic, it is probable that this increase will not keep pace with population, and that the same tendency was probably true as regards operating expenses, that some stimulation was necessary to promote the movement of population to and from the city to the outlying suburban districts, that a free interchange of suburban and urban population is not only desirable from the standpoint of gross earnings, but there seem to be sound economic and social reasons why a central zone should not be restricted to a three and one-half mile area, as such a restriction might tend to cause undue congestion of population and that owing to the lack of other small coins than one cent and five-cent pieces distance rates could not be put into general effect, except through tickets sold in larger quantities and of which no one could avail themselves unless they were in position to purchase and use several tickets.

Where such disadvantages, however, can be obviated, the Commission considered the zone system not without merit, and stated "Zone rates are to a certain extent distance rates, or rates which increase with distance, though not in the same proportion. Such increase in the rates with the length of the haul are in line with the cost of the service and this cost, also increases with the length of the haul, and it was not easy to get away from the principle that for such services as those rendered by public utilities, each person or class of persons should be charged in proportion to the cost of service they obtain; that for the present at least the best system of rates is probably a system under which there is but one fare zone for an area that varies from about four to five miles, depending upon conditions that such a system would tend to cause people to move away from the more crowded districts into other sections."

The Company suggested a suburban one mile two-cent fare zone system outside a three and one-half mile central zone, as a general solution of the suburban fare problem, and did not at the time have access to the calculations made by the Commission upon which it had determined that a passenger haul of four miles might be remunerative. The Commission viewed the case, at least in part, from the standpoint of the three applications then before it for an extension of the city fare zone, and which the three and one-half miles central zone would not accommodate. The unlimited extension of the city fare zone on more profitable lines would soon lead to a very unsymmetrical distribution of city fare points, and subsequent apparent discrimination between localities of the same community.

If we were asked to state the conclusions which in our opinion might properly be drawn from the opinion and decision of the Railroad Commission of Wisconsin in the Milwaukee fare cases, and the thoughts suggested thereby, we would summarize them as follows:

(a) The theory of law, under which the charges for service by public utilities are regulated, is in a formative state, and the legislative and judicial arms of government are searching for the correct principles. That the principles to be later accepted as correct will be affected by the voice of the people is evident to any one following the popular trend of legislation and judicial decisions. Rate regulation began in an endeavor to eliminate unjust or unjustifiable discriminations, or to bring the rate of charge for service into line with rates of charge for similar service existing elsewhere. Slowly, in response to the oft expressed wish of the people for lower than the prevailing rates, economic and legal theories have been developed by which the amount of capital invested and the return to which it is entitled can be measured. If the method of measuring invested capital be assumed, and be practiced for a sufficient length of time it will sooner or later receive general recognition and acceptance by economists and judicial tribunals. Thereupon the road to lower rates of charge is made smooth through the application of a rate of return on capital slightly above the amount that would result in confiscation. The tendency is apparent to-day although the demonstrations have not as yet been numerous.

(b) The earning value or estimated amount of capital invested in the property, used and useful, as determined by regulating bodies, will probably rarely exceed, and more often be less than the reproduction value new of the physical property. Instances where such values so determined are equal to the par value of the securities outstanding would be the exception rather than the rule. The eventual application of ordinary interest rates to such values will result in large losses to investors.

(c) Inventories and appraisals are by their nature subject to large probable errors, and the actual cost of construction will in the majority of cases exceed the appraised cost unless such be based on accurate records.

(d) With the increasing importance of physical value as the principal element of value in rate cases, there is required a new system of accounting, which will show the cost and age of every element of physical property. This method of accounting, were it available to-day would be of far greater importance in rate cases than the system of capital accounts now in use.

(e) The valuation of a public utility property for purposes of taxation may materially exceed its value for rate making purposes as in the present instance. That the principles of taxation are in as unsettled a condition as are those applicable to rate regulation, is probably true. Since taxes are often assessed on the principle of ability to pay or the theory of comparative sacrifice, the capitalization of the amount of taxes at the current tax rate may result in values largely in excess of those determined for rate making purposes.

(f) Profit sharing, as exemplified in the London sliding scale of gas rates is not consistent with the principle of rate regulation by Commission. The latter principle contemplates the sub

stitution of control by the Commission for the ordinary bargains or contracts of the past. The influence of this control on future methods of management is difficult to forecast, but that it will reduce the incentive for the exercise of the greatest economy is not impossible. This is one of the most serious objections to governmental control of rates.

(g) Data relating to the lives of the elements of street railway property are almost entirely lacking, and the street railway industry owes it to itself to compile statistics based upon history rather than upon opinions that will be conclusive and permit the determination of the present values of physical property, and the annual allowance for depreciation and maintenance with a degree of accuracy approaching that of premiums determined for the insurance of human lives. In fact we have come to believe that the economics of the street railway industry will remain in a more or less confused state until the same principles that reduced the hazard of the business of life insurance are applied to our industry. Criticism of legislative and regulating bodies for not making sufficient provision for the contingencies of the business will not stand until the owners and operators of utilities take practical recognition of these contingencies in their accounting.

(h) The street railway business is the most hazardous of municipal public utilities, and as such is entitled to larger rates of return on invested capital, than are necessary to attract investment in the other classes of utilities. If the return be limited to seven and one-half per cent., only the necessity of preserving the investment already made, will afford any justification for making further investments.

(i) And finally and with more specific reference to the Milwaukee cases, we are not prepared to state any serious criticisms of the methods used by the Wisconsin Commission in applying its principles of regulation of rates, but we find difficulty in reconciling ourselves to these principles.

MR. DUFFY: On behalf of Mr. Stearns, I want to express my appreciation of your reception of his paper. We will now pass on to the report of the Committee on Determining the Proper Basis for Rates and Fares. As you will recall, the Association in January, submitted this question to a Subcommittee of three, composed of Mr. Ford, Chairman, Mr. Bradlee and myself. This Subcommittee of three had meetings in New York, and work was outlined for each of the three to undertake, as will be shown here. Unfortunately Mr. Ford was unable to come to Chicago and requested me to present the report for him. Mr. Bradlee also was disappointed in not being able to come. It was the intention of the Subcommittee to present only a brief, one-page letter; however, at the risk of trespassing on your time, I am going to refer to some of the points in these memoranda. It was the judgment of the general Committee, which held a session last night,

that this would be the proper thing to do, notwithstanding the fact that it was the intention to have the memoranda printed and distributed to the members and have the whole matter taken up at the January meeting. I want to say that Mr. Ford and Mr. Bradlee, on account of extraordinary demands on their time, did not have opportunity to revise their memoranda as they wanted to, and this must be taken into consideration. As far as my own memorandum is concerned, I do not wish to revise it, it will have to be taken for what it is worth as it is.

REPORT OF THE COMMITTEE ON DETERMINING THE PROPER BASIS FOR RATES AND FARES

To the American Electric Railway Association:

GENTLEMEN.-Your Committee on Determining the Proper Basis for Rates and Fares in answer to your instructions to work out a theoretical basis for determining fares on properties having annual gross earnings (operating revenues) of from $100,000 to $5,000,000, considering each $100,000 of earnings from $100,000 to $1,000,000 and each $250,000 of earnings from $1,000,000 to $5,000,000, taking into account particularly the factors of mileage, population, character of construction, providing for all operating expenses, taxes, fixed charges, depreciation and suitable return on investment, based on a twentyyear franchise, and also on an unlimited franchise," begs to submit herewith a detailed memorandum by each of the three members of its Sub-Committee showing:

First, the hypothetical treatment of the problem presented (Appendix A);

Second, the actual figures of existing street railways (Appendix B), and

Third, a general treatise of the fare subject in the four metropolitan cities, New York, Chicago, Philadelphia and Boston, which, although somewhat outside of the scope of the question, deals with some important features of the fare situation (Appendix C).

We would recommend that these memoranda be printed and circulated among the members of the Association so that full discussion may be had at the Mid-winter Meeting, at which time a plan will be submitted by the Committee looking to carry forward this work by all members of the Association.

This Committee, from a further study and as shown in these memoranda, has been confirmed in the conclusions of its previous report

in that the street railway business as conducted in this country, is "selling goods below cost."

It notes with interest the decision of the United States Government to establish a zone system in connection with the Parcels Post which begins operation next January 1st. In a business such as that of electric railways where approximately 333 per cent. to 40 per cent. of the traffic is handled within 3 to 5 hours out of the 24, this representing practically the lowest load factor of any public utility, and where the cost of living and consequent wages paid are increasing by leaps and bounds, it is essential that the present five-cent fare be limited in distance, and for the street railways of $5,000,000 annual gross earnings and less, as outlined in your instructions, it is apparent that the length of ride should not be over four miles.

Respectfully submitted,

FRANK R. FORD, Chairman,

C. S. SERGEANT,

C. N. DUFFY,

WM. J. CLARK,

E. C. FOSTER,

H. G. BRADLEE,

R. I. TODD,

JAMES F. SHAW,

Committee on Determining the Proper Basis for Rates and Fares. October 10, 1912.

APPENDIX A

A THEORETICAL BASIS FOR DETERMINING FARES ON PROPERTIES HAVING ANNUAL GROSS EARNINGS OF FROM $100,000 TO $5,000,000.

(MEMORANDUM.)

By C. N. DUFFY, Vice-President and Comptroller

The Milwaukee Electric Railway and Light Company, Milwaukee, Wis. MR. FRANK R. FORD, Chairman:

DEAR SIR. By action of the Executive Committee of the Association at the mid-year Convention held in New York, January 26, 1912, a Sub-Committee, consisting of yourself, Chairman, Mr. H. G. Bradlee and myself, was appointed "to work out a theoretical basis for determining fares on properties having annual gross earnings (operating revenues) of from $100,000 to $5,000,000, considering each $100,000 earnings from $100,000 to $1,000,000 and each $250,000 from $1,000,000 to $5,000,000, taking into account particularly the factors of mileage, population, character of construction, providing for all operating expenses, taxes, fixed charges, depreciation and suit