SERVICE AND RATES

Conditions Affecting Service and Rates.

A telephone company does not sell a physical product as do other utilities. It does not deliver any commodity comparable to electric energy, steam, water, or gas. Service alone is furnished; or, better stated, service is made available.

The value of this

service so made available depends on the number of other individuals with whom a subscriber can communicate. The interdependence of service, the fact that there must be two parties to every telephone conversation, leads to a recognition of the principle that the fullest usefulness and greatest value of telephone service is had when the largest number of subscribers are served.

The average subscriber knows little of the construction and operation of the telephone system serving him. The general impression seems to be that telephone equipment is simple and its operation not difficult. Nothing could be farther from the fact The telephone is so much a part of our every day life that it is regarded as commonplace, and, perhaps for the reason that a physical product is not delivered, the fact that much expense is involved in furnishing service is not appreciated.

Another distinguishing difference between the telephone and other utilities is: Telephone service, within certain limits, increases in both cost and value per unit of service with growth of the business; in other utilities, cost per consumer generally decreases as the number of consumers increases, and the number served gives little or no added value to the service. This difference arises out of the very nature of the service. One using gas or electricity is not benefited directly by the fact that all others on his street or in his neighborhood do so. This is not the case with the telephone.

Up to a certain point the value of telephone service, as we have pointed out, is measured (1) by the number of persons with whom the subscriber can talk, and (2) by the use made of the service by the individual subscriber and all other subscribers. Both of these factors increase as the system grows.

The cost of service must include the expenses of operation and return on the value of the property used. The operating expenses, as we have seen, are roughly divided into Traffic, Maintenance, Commercial and General Expenses. The cost of handling traffic depends largely on the density of traffic which increases per station as the number of stations grows. Maintenance Expenses, of course, increase as the amount of plant increases. General and commercial expenses are not so much affected by small changes in the number of subscribers.

The investment may be considered as (1) the office buildings, central offices, switchboards, equipment, etc.; (2) the cables, wires, etc., connecting subscribers with the central offices and connecting the central offices with each other, the necessary poles, conduits, etc.; (3) the instrumentalities located in the home or office of the subscriber.

Investment in central office equipment increases much faster than the number of subscribers because each new subscriber must be connected up with all others and suitable allowance made for future growth. Further, if growth increases to the extent that additional exchanges are necessary, every exchange must be connected with every other one, and cable investment, etc., increases in proportion. Investment in outside plant, wires, poles, etc., continues to increase as the system grows; new subscribers are found at greater distances from central offices and as the community grows, more expensive construction, underground systems, etc., are required.

With regard to the instrumentalities in the subscriber's home or office, the cost is about the same per subscriber and does not vary with growth.

Therefore the important expense items tend to increase faster than the growth of the business. Of course there may be instances, during the development of business, where growth will be had without any addition to investment or increase in operating expenses. The experience of all telephone companies is, however, that in communities of normal growth these conditions are more or less temporary being frequently followed by increased costs per station, so that the rule stated remains generally true for any exchange. A careful study of the history of telephone investments and expenses in New York city, Buffalo, Syracuse, or almost any other community in the State, furnishes evidence of this.

Certain characteristics of good telephone service are fundamental. The degree to which these fundamentals are important depends on the size and character of the community served. Service which is satisfactory in small communities may not be satisfactory in the larger villages and cities. As communities increase in size, not only does the cost of rendering service increase, but it follows that a higher grade of service is demanded.

In the telephone business continuity and reliability of service are essential. Permanence is an integral part of reliability. Subscribers want telephone service which will not fail them in emergencies and a system which will not have to be replaced with another every few years. To have these depends in large measure on the proper maintenance of plant and equipment. During the past few years the cost of labor and materials and the difficulty of obtaining both have resulted in a situation where subscribers have frequently had to wait for six months or longer for a telephone. A public utility is under an obligation to provide sufficient plant so that such delays shall not occur.

In order to secure first hand information respecting the methods employed by the New York Telephone Company, and the service furnished by it in the various exchange districts throughout the State, the Commission directed a service investigation to be made under the direction of its chief engineer. Each central office district within the State of New York outside of New York city was

visited and interviews had with persons using each class of service there furnished.

This investigation was directed to the character of the service furnished, the equipment installed, the extent and character of industry in the community, the social and business demands for telephone service, the availability of labor, the wages paid by the company and the number of employees in its service. There were 1554 subscribers interviewed with regard to service, speed, accuracy, audibility, directory, repairs, installations, removals and as to toll and exchange rates.

It was found that complaints generally were based on rates, or difficulty of securing telephone service, or, print and make-up of directories, or on certain company practices and rules. While unjust treatment or unsatisfactory service might be established in a few instances, the number was so small in comparison with the great number of subscribers within the State as to furnish convincing proof that the great majority of telephone subscribers find the service of the New York Telephone Company reasonably good.

RATES

Just and reasonable rates are those which cover the cost of the service in the aggregate and do not exceed the value of that service to the subscriber. The company can not exist unless it has a reasonable return from the service which it sells. On the other hand, the subscriber will not take a service worth less than he has to pay. Therefore, as a first consideration, the rate structure must provide different classifications in order that users can choose the class of service desired.

The company's two principal sources of revenue come from exchange use and toll use. An exchange rate is one where a fixed amount is charged for service rendered subscribers within the local service area. Toll rates are the charges applying to calls from one local service area to another local service area.

The extent or scope of service given in the local service area must be such as to cover the majority of calls of the average subscriber. If the area be too extensive, that is, carried to such an extent that it will cover all the calls of every subscriber, it necessitates so high a level of exchange rates that a majority of the subscribers will not be able to pay for it and the service rendered will be more extensive than most subscribers require, which operates against the fullest development of the service. When the size. of the exchange area is properly adjusted, a charge can be made which will not penalize the small subscriber and yet be large enough to comprehend the majority of calls of the average subscriber. The entire State of New York is divided up into local service areas, commonly referred to as exchange areas.

There are two ways in which telephone rates can be made. One is to make a single rate for all types of telephone service in the company's territory; the other is to group different communities into rate groups and apportion the charges so that the revenues

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from the different rate groups and the different classifications of service within these groups will make up the total amount of revenues necessary to pay the company's operating expenses and provide a fair return on the value of the property used in rendering service. If the company had one general rate covering its entire field, it would be so high as to destroy development. Therefore, rates are made with regard to both cost and value of the service. Value of service is taken into consideration, for if cost alone is considered the rates for identical service will vary with each particular community.

The cost of furnishing service varies with the size of the exchange, the density of population, character of the use, the physical characteristics of the territory, the regularity of the layout of the exchange area and the age of the plant.

Segregations by classes of service are practicable in any exchange, that is, for business, residence, individual lines, party lines, etc. As a rule business subscribers being in the center of the municipality and nearer the central office require a minimum of outside construction. Residences are ordinarily farther away and the amount of outside plant is a maximum. The value of business telephones, however, as a rule, and except in very large cities, varies in an almost direct proportion with the number of residence telephones. The extensive use of residence telephones makes the telephone valuable to business. The type of business service required also affects the cost. In the cities exclusively individual line service for business purposes is required, while in smaller towns two-party line service is generally satisfactory. Types of Exchange Rates.

Flat rates are local exchange rates allowing a subscriber unlimited use of his telephone for calls within the local area at a certain fixed charge per month. Measured rates are those where service is made available and all incoming calls delivered free to the subscriber for a fixed sum per month. A certain number of outgoing calls are also furnished with additional outgoing calls charged for at a per message rate. Measured service has been introduced quite extensively in the larger cities. It tends to eliminate waste and equitably distribute the cost of the service. Measured service is necessary in the larger cities because of the variance in telephone Some subscribers use thousands of messages per day, others but a few, and if the cost is distributed per station, that is flat rates, the small user is paying a share of the cost of equipment and operating labor necessary to furnish service for the large user. One objection to measured service, however, is that it restricts telephone use. Social use of the telephone serves a useful purpose and has a great bearing on station development. So that generally, flat rates, particularly for residence use, while not so correct or scientific, are more desirable and satisfactory.

use.

The introduction of measured service depends on the variance in use and the cost of measuring that use. Unless there is a wide

variation in the amount of use between subscribers, flat rates are fair to all, and unless the cost of measuring or metering the service is less than the savings effected thereby to subscribers, measured service is not necessary or economical. When measured rate schedules are necessary they should, particularly for residence service, include a number of free messages at the initial rate. The minimum rate should, however, be large enough to cover a fair portion of the cost of furnishing service, leaving the balance to be absorbed in the rate per message. The minimum rate per message, under such a schedule, should not be less than the cost per message of furnishing the service; otherwise the object of measured service would be defeated.

"Readiness to Serve" Charge.

Instead of the usual message rate schedule a "readiness to serve" charge, lower than the minimum message rate charge, is frequently proposed. Such a schedule carries with it an additional charge for all messages.

It is difficult to say whether such a schedule would more nearly relate the cost and value of service. As the cost of giving service to any subscriber, as well as the value of that service, varies with the number and location of other subscribers, and the use which other subscribers make of telephone facilities, so the cost of furnishing service to all patrons rather than the cost of service to the individual is the important factor.

We are satisfied that such a rate, no messages being included with minimum charge, would greatly restrict development. Every careful investigation so far made within our knowledge has shown that such a "readiness to serve" charge penalizes the small user in that the "readiness to serve" charge without messages has always been found to be approximately as high as the usual minimum charge with free messages included.

An example of this is set forth in the report on telephone rate schedules prepared by the Bureau of Municipal Research of the City of Rochester, where the base rate arrived at without messages was $5.50 per month although the present rate in effect in Rochester is $4 per month including 80 messages.

NOTE 1. In discussing rates in the State of New York, although there may be no legal discrimination, it is a fact that by franchise and other require. ments of the various municipalities in the State of New York, much telephone service is given free or at rates which are not compensatory. The effect of this can only be to put the additional burden on the private subscribers. Lists on file show 670 municipal contracts carrying 100 per cent discount, 517 with discounts of from 25 to 80 per cent and 70 with discounts of from 5 to 25 per cent.

NOTE 2. In discussing message rates no mention has been made of the method followed or appliances used in counting and charging for messages. It having been suggested during the progress of this case that individual coin box telephone service might be advantageous in the larger cities, particularly in Greater New York, and it having also been suggested that the method of charging for messages and the mechanical appliance used in connection therewith might be subject to error, much testimony was taken, many exhibits submitted and a critical study made of these subjects. Appendix V presents a digest of the evidence with regard to these subjects.