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I doubt if many companies are able to show a profit on the sale of appliances, piping, etc. in fact, most of them have been willing to do the business at cost or less. It would take some careful analyses to etablish whether or not the segregation such as Mr. Lloyd proposes would not be to lower, rather than raise operating costs, provided that all expense incident to this business should be charged against it. It would also be exceedingly difficult to establish the wholesale price of residuals.
As I understand Mr. Lloyd's paper, it appears to me that the London sliding scale accomplishes about the same end that Mr. Lloyd is seeking. This system, while it has been used in England a considerable number of years, has been adopted in but one city in the United States, so far as I know.
This system consists briefly of the adoption of an initial price for gas and a standard rate of dividend upon the stock of the company, with an arrangement whereby the dividend rate may be increased or shall be decreased a definite amount upon a decrease or increase in the price of gas, provision being made whereby loss of dividends owing to high operating costs may be made out of future profits, also a reserve fund may be accumulated to take care of extraordinary expenses.
I would like to discuss this paper a little. It is a very good one, it opens up a new line of thought. I think, however, that Mr. Laraway is right, in that it would be very difficult to persuade the courts that the net earnings of a gas company can be so divided as to exclude certain earnings in arriving at the total net earnings or net profit as a basis for a fair return on the investment or rather the replacement value of a gas company. The question, as I look at it is really this, and it is a question that is of some importance to us, and, in fact if you allow me to say so, without any reflection on anyone, it is of far more importance to us now, than the variables in gas coal, or the prepayment meter, or how you pay your solicitors. Now, on each of those questions, you have had good discussions, but this in my opinion is the most important thing, which concerns the gas fraternity today. The question, whether gas companies, or other public utility
companies, are to be allowed to earn only 5% or 6% interest on its actual replacement value, and whether, as soon as they are earning that, they incur the danger of the courts or commissions taking away any larger profits they may make. I think you will all agree that this would absolutely take away all incentive in our business to reduce the cost of gas, or to sell more gas. Take for instance, a company, we will say, that has a million dollars of property and this company gets up to the point where it earns six per cent. on that amount. Now by hard work and efficient and progressive management they eventually reduce the cost of the gas, and they sell more gas, and consequently they show in due time ten per cent. on their investment. If that company knows that that extra four per cent., as soon as it earns it, can and will be taken away from it, either by the courts or by a public service commission, there is not very much of an incentive to make strenuous efforts to reduce the cost and increase the sale of gas, which in the past usually resulted in larger net profit for the company and always in lower prices to the consumers. It appears to me that in this, the courts and the public service commissions would make a mistake, and kill the goose that laid the golden eggs for the consumers. The public has benefited in the past by the fact that the gas companies have increased their output and decreased their cost of producing gas. I think the public has benefited far more than the gas companies, or the people that have money in the gas companies.
This question has been largely ignored in our discussions, and I think it is a very important one. We get together, and we devote a lot of money to supporting a scholarship at the University of Michigan. This is all very good. It is important but, it is not so important, in my opinion, as that we should get together throughout the United States, and take measures to protect in a legitimate way the interests of the people who put their money in public utilities.
I have read Mr. Lloyd's paper very carefully. I think it is an excellent paper. So far as the byproducts, he says that they are usually credited to the cost of gas. We have never done that with our companies. We keep our earnings entirely separate on our books. At the end of the month, we credit the net residual earnings to our earnings account in a separate item.
In the matter of the appliance earnings; I do not think any of the gas companies have ever had any trouble about the net earnings from the appliance department, being so large that they would materially effect the earnings that are applicable on the fixed charges and stock dividends of the company,
Mr. Lloyd says the price of tar, of ammonia, and of coke fluctuate with the ordinary laws of supply and demand, and in a manner wholly unrelated to any fluctuations in the price of coal, or of labor. Now, the prices of coal and labor have always fluctuated, and also cause fluctuations in the cost of gas. He says, “Any advance in price, obtained by any manipulation, rectification, refinement, or demand created by the efforts of the company, is not a factor of the gas company's operations as a public service corporation.” I am inclined to believe that, if we should run our appliance department as a separate account altogether, and charge all of the cost of promoting new business and the entire cost of running the appliance department to the appliance account, our cost of gas would be lower and our net earnings higher, while the appliance account would very probably show a loss. This would have the opposite effect, it appears to me, at which Mr. Lloyd is aiming. We would all be glad to have the commissions and the courts take the same view as Mr. Lloyd does. But, personally, I question whether his arguments would carry very much weight with the courts.
He says also that there is no protection to the company, through its contract with the public, that it shall secure an adequate return thereon. That is just the difficulty. There is never any protection for the company against loss. Although the commissions and the courts can and do protect the public, yet the companies have not by contract or franchise right any protection of their investment against loss, and no commission or court can protect them. For that reason, it is a rather one-sided proposition, for while they may prohibit your from earning a liberal amount on your investment by good work and good management, they can not protect you against any loss by accident, the entrance of natural gas or a competing company, and that is a rather unfair and one-sided proposition, it appears to me.
Mr. Sloan told about a company that figured its earnings from the amount of money in hand at the end of the year. I think there are very few of us who would care to run a company on that basis. It is very fine to have cash in the bank, but unless you know where the cash comes from, it is not a very safe proposition to base your net earnings upon the cash on hand. I think the company's books ought to show the true condition of affairs. Mr. Sloan is absolutely right in saying that a gas company has no leg to stand on if it talks depreciation and then comes into court, with its books showing that they have not taken it into account. If you believe in depreciation, you ought to show it on your books. Do not expect the courts to do this for you. My experience with the courts is, that they take into consideration the figures as actually on the books, as shown by expert accountants.
All the work we do in carrying on the new business department, the appliance department, selling gas ranges, is really with the one object of selling gas. I think we all agree on that. We have always stated that in our discussions. We say that we don't want to sell gas ranges, we want to sell gas, and after we have always taken that stand, it is going to be pretty hard to turn around and say, that it is a separate part of the business. We have not the same interest in that part of our business as the hardware dealer, as the hardware dealer is looking for the profit on the gas ranges. When we sell gas ranges, we are looking for the profit that will come to us through the gas used.
E. F. Lloyd :
Mr. Cobb contributes valuably by emphasizing that the subject can not be discussed hastily.
I would, however, point out that his suggestion, that it may be argued, a company should sell its tar in bulk, yet ought to retail coke for the highest ultimate price, involves a contradiction in principle and an admission of mere expediency. There is no essential difference between preparing coke for retail sale for delivery in small lots and distilling tar for sale at a higher ultimate
price as pitch and creosote, etc. One is customary, the other is not, that is all, neither are public functions. Neither involve the employment of capital necessary to the proper fulfillment of the obligations undertaken in the franchise agreement.
Mr. Cobb’s expressed personal belief that it is better gas companies should avoid the appliance business is a key to the situation. If they may avoid it, they are under no obligation to engage in it. If then their corporate charters permit or do not prohibit their engaging in it and they elect to engage in it, that business is then their private and not a public affair, in the same manner and to the same extent as any other private corporate operator. Answering Mr. Ritter's Discussion :
I think Mr. Ritter's view is largely in accord with my own. As to the correctness of the basic principle of segregation or separation, I have no doubt whatever, but I fully agree “that it is very probable that the best practical method of carrying out the principles will not be discovered until several have been tried.”
My own application of the principle has been continually in process of evolution, yet without in any wise involving the principle itself.
As to what should be the basis of charges and credits between the public and private operations of the company in dealing with residuals, and measurably what should be classed as public and what as private attributes, are but details and open to discussion; but as to whether there should be both public and private operations, I hold is fundamental and in my mind at least, it is settled that there are and that no other basis is logical, equitable or enduring In Respect to Mr. Sloan's Discussion:
I think he should have pointed out wherein the paper permitted the drawing of the conclusion “that a gas company is entitled to charge to its operating expense for complaint work, an amount greater than actual cost in order to credit some special account a profit from such work.”
Commissions and the public will ultimately coincide with what is generally fair, but they can not be expected to point