address on "Automatic Rate Regulation" by Mr. Oscar T. Crosby, President of the Wilmington & Philadelphia Traction Company of Wilmington, Del., and President of the Trenton & Mercer County Traction Corporation of Trention, N. J. Mr. Crosby has rendered notable service in our behalf recently in connection with the tour which was taken by President McCarter and his associates. For his activity on that trip we owe him very much indeed, and now he is going to put us more deeply in his debt with what is bound to prove to be a very pleasing and able presentation of his case.

AUTOMATIC RATE REGULATION

By OSCAR T. CROSBY, President.

Wilmington & Philadelphia Traction Co., Wilmington, Del. Trenton & Mercer County Traction Corporation, Trenton, N. J. When our efficient Secretary was urging me for a title for this address he suggested the following:

66 SOME NEW PRINCIPLES

I, however, hesitated because in some recent reading it seemed to me that I found in the pages of that prince of historians a recital of almost every possible combination and complication in human affairs. Therefore, modesty required that some other title be invented. Hence that which appears in print, "Automatic Rate Regulation."

Perhaps, indeed, something new and useful may be found in the provocation of thought and in the definiteness of formula which I have to present in connection with rate regulation. But the very elements which enter into the problem I think can be traced in the decalogue; I think they may be found throughout the statutes of all civilized nations, and I trust they may be found in the consciences of men called upon to exercise authority over their fellows. It is not a new principle to demand that investments made when no thought of limitation has been presented, or, if presented, would have been entertained, should now be left in the state in which the Commission usually finds them. But it may be a relatively new convenience, in dealing with these matters, to establish a sliding scale of return between investmests made in the past under conditions of risk and without thought of limitation, as compared with investments made now in the same enterprises when some definite understanding is sought on both sides. It may be said to be true that as compared with the famous House of Lords' decision the proposition that "Return to Capital" shall be taken as the almost sole rule of reasonable rates, is new, but it is not new as

compared with the suggestions of Courts and the general trend of public opinion throughout all the land.

I believe, as a matter of fact, that the House of Lords' decision, which is still quoted by our attorneys, is rather a handicap to us than a help, for it is now being considered as having been replaced by the Supreme Court decision in our own country. That decision has suggested to many minds that 6 per cent. upon something vaguely called by the Court the "value of the property," is a limitation proper to be observed. As a matter of fact the Court delicately handling the question of unconstitutionality in a statute was merely putting up a boundary around property so that any incursions within that boundary should be called confiscations and should thus be declared illegal.

It seems to me, however, that before the Court can pass upon what is confiscation, it must pass upon what is property, and if the House of Lords' decision, conveying the usual common law view of the subject, be at all accepted, then not 6 per cent., but 16 per cent., or perhaps 60 per cent., would be an allowable return upon capital invested in a public utility.

That was the essence of the House of Lords' decision. It would then be as much confiscation of property to make rates aimed at a reduction from 16 per cent. to 8 per cent., as it would be confiscation to aim at a reduction from 6 per cent. to 4 per cent. It was a property right to earn 16 per cent. or whatever the property may have been yielding at the time, because no check had been laid by the Common Law upon these returns. It was confiscation of property to control these rates if the House of Lords' decision be taken as a true basis. On the other hand, we should not for a moment concede that the delicate compromise effected by the Supreme Court, in order to protect something which it should eventually decide as property, must be taken as a guide for commissions in establishing rates which shall result in permitted returns to capital. We must go further than these strictly legal precedents. We must insist that a great question of public policy is now before the country for determination, and we must resolutely urge our Attorneys, urge all of our representatives before Commissions and Courts to resist the theory that any precedent has been established of the kind so often heard in Courts on the subject.

In this matter of public policy it is some of the Commissions, some of the Attorneys of the Commission, who are urging that which might be called new policy. They are urging substantially this theory; that investments made without thought of limitation, investments made honestly in the purchase of experimental machinery, necessary for the development of an art, are no longer to be considered as entitled to those varied and sometimes large returns which were obviously in the contemplation of all when the investments were made.

In Baltimore a few days ago, I heard from the lips of a very charming young lawyer, representing the people, in a case before the Public Service Commission of Maryland, a statement as to the principles which be believed were now established by Courts and Commissions, and which should morally guide the Maryland Commission. They were such principles as would, if applied, render criminal the establishment of any new enterprise involving the money of others than those who promoted it.

Substantially, the case was going on ground already too familiar. Endeavor was being made to create that fantastic entity called "replacement value." This, presumably, having been erected it was intended to apply to it some rate, such as 6, 7 or 8 per cent. The principles supposed by the young attorney in question to govern were such that, as he stated, if rigidly followed, would permit nothing more than bond interest to be paid by the Company in question, anything beyond that he called a gratuity.

Suppose any man in my hearing should endeavor to float a new enterprise upon such basis.. It is perfectly plain that he could not get money from experienced men if he explained to them the conditions. which were endeavored to be established in the case in question. Let us be clear as to what these are. They are now being applied, ex post facto, in the arguments before Commissions. Let us see how they would sound if they surrounded an entirely new project. They amount to this: that all the money which we are to put in the project now and which may, in the course of time, be swept out of actual existence by virtue of changes in machinery, shall no longer, at some day of rate regulation, have any standing in Court. They further suppose that all the losses of return during lean years shall have no standing in Court. They suppose that all the vexatious processes which time involves in the slow building up of an enterprise, and we shall always expect them, shall have no place in Court. They suppose that some unheard of contract shall be left for the complete and over-night construction of the public utilities of a great city. They suppose that to this shall be added some so-called "reasonable" amounts for supervision and for various other elements more or less the subject of contention.

Eventually some absurd figure is reached which has about as much relation to what may have been the actual cost of the property in the last twenty-five years as were the number of second-story windows in the city in question compared to the number of dollars invested. Now, let us suppose that all this is laid before an investor and that it is further added that he will not be allowed at any time to earn more than 6 or 7 per cent because bonds on enterprises in the past have been floated at that rate.

I repeat, that it would be perfectly obvious that an experienced business man would reject the whole proposition as absurd. If, then, I

actually succeed in floating an enterprise to-day on the principles which are proposed for the guidance of commissions, then it is obvious that I must have gotten my money either from experienced men by suppression of the facts or from poor devils, inexperienced in business, who cannot understand the complications indicated in the outline above given, and whose money is taken from them and put at serious risk under conditions which should be counted as nothing less than knavery on the part of him who would take money from such people. It would then be much more the duty of the splendid young attorneys who draft themselves into the so-called "Up-lift " movement to prosecute men who should apply the principles that they espouse than any other up-lift movement that I can see them engaged in.

Let me repeat, in order that this may not lose its place in your mind, that to raise money for a new enterprise according to the principles being urged upon many Commissions, would involve that either knavery had been practised in dealing with intelligent people or that poor gudgeons has been entrapped who were incapable of understanding complications of business.

The true principles, as I understand them, which would govern in these cases, may be thus stated: But returns upon capital invested in the past, should not by arbitrary rate regulations be reduced. In time they inevitably will be reduced by the inexorable law of decay. Competition, bad management, charge of supporting industries, increased cost of operation—some or all of the nevertiring canker worms will surely destroy the now lovely flowers. No matter how high these returns may have been, they were permitted by the general consent of the public and they have served as the basis for the purchase and sale of securities throughout the land.

DEFINITENESS AS TO RATES FOR NEW AND OLD MONEY

Passing now to new money to be invested in old enterprises, I urge above all things that definiteness should be reached. That there be no room for further backing and filling, such as is now taking place throughout the country. We are now exhibiting to the world a chaotic condition in serious business matters which must make us hesitate to declare ourselves a clear headed and practical people.

Let us be definite in respect to the fact that old money in old enterprises shall be permitted to receive whatever returns it may have received in the past, no matter how high, and that if we are to be limited, as I believe we shall be, as to returns for money invested in the future, then the amount of such returns shall be definitely formed. It may be asked how can these two separate rates of return be allowed to the same property? The matter is extremely simple. Suppose that fifteen years ago you and I had established a public utility at a cost of $1,000,000. Suppose we had been earning 20 per

cent. on that $1,000,000 ever since. Suppose that now in some extension we desire to spend another million dollars. But the public says tɔ us, “You have made money. You have had what must be considered very satisfactory, indeed unusual returns. Now you have grown, your strength is due to the partnership that exists between you and us. We have the power and we intend to exercise that power of regulating your rates with respect to the returns to capital. The new million of dollars which you now desire to put into this old enterprise we think should be limited to 8 per cent."

Suppose, then, this agreement be definitely made. It would be sufficient, in order to be executed, that the total profit to the stockholders, bondholders, or to interested parties in whatever classification, which shall be annually taken from the property in question, shall not exceed two hundred and eighty thousand dollars. If this limitation be observed then the old principles of fair dealing will have been observed. Then the thing again which is old and important will have been observed; namely, the definiteness of contracts shall have been established between parties having important relations to each other.

It will not be in the least necessary that the public should concern itself as to how the two hundred and eighty thousand dollars of profit annually taken from the enterprise shall be distributed. It is far better that this should be left to those who have the responsibility of conducting the enterprise. Whether this money goes to bondholders, stockholders of one class or another, or to noteholders, all this may be left for private adjustment. The upshot of the matter will be that an average rate of 14 per cent will be permitted. and that of course there is no guarantee surrounding the matter in any respect whatever.

Some will say, But even this is too high." Shall the public be indefinitely burdened with 14 per cent on $2,000,000 engaged in a public enterprise? My answer to that objection is this. That, alas, nothing in human affairs is permanent enough to warrant the supposition that there should be an unlimited return of 14 per cent upon this money. Something will happen, something has always happened to destroy every enterprise which man's hands have established. We may be quite sure that disaster in one form or another in the course of 100 or 200 years will intervene to upset the carefully arranged plans which so occupy our minds to-day. Hence, as an individual of the public, which is to permit rates that in themselves may return 14 per cent on this $2,000,000, I may cheerfully say to myself, that my great-grandchildren will be entirely freed from the matter, and in some way or other will be dealing afresh with the question, let us hope with more intelligence than we are now dealing with it.

And it must be further supposed that any such return as I have supposed, would be an exception - one of those necessary exceptions