SECOND SESSION

MONDAY, SEPTEMBER 12, 1910, 9:30 A. M.

SEGREGATION OF GAS AND COMMERCIAL
ACCOUNTING.

Ernest F. Lloyd.

In speaking to you to-day upon the "Segregation of the Gas and Commercial Accounting of Gas Companies doing a Merchandising Business," I am afraid your President will feel that I have taken much liberty with his subject. For it is not my purpose to enter into any details of such accountancy; but rather to suggest for your consideration an analysis of the underlying elements of being of the modern gas company; to discuss its growth from its original simple character to its present essential complexity, and to point out the influence which comprehensive segregation of accounting may be expected to exert in any proper determination of equitable relations between the Public and a Public Service Corporation-more particularly, a Gas Company. PRECEDENT AND CUSTOM.

Precedent is our most powerful and arbitrary law giver, Custom is Precedent's bailiff.

Now Precedent has decreed that a Gas Company is only a public service corporation, and Custom that its revenues shall be thrown all into one pot; while much specious talk has well nigh convinced the Public that the shareholders shall draw from the pot no more than common interest and that the mere possession of a franchise is in itself a guarantee of great earnings. And Gas Companies, while continuing to live within Precedent's boundaries, have established many new activities without defying the bailiff.

To present the philosophy of this subject with some degree of adequacy, it seems to me necessary to carry you back to a time

antedating the public service corporation in any form, to thereafter enquire into the Gas Company's original function, whence we will step to the present to find it, what for lack of imagination I will term, a Quasi-Public-Service Corporation.

THE INDIVIDUAL AND THE HIGHWAY.

Many moons ago Precedent established that the individual might take title to land in fee simple; but so that every man should not be confined to his own land there were certain parts thereof, yclept the King's Highway, reserved for the common use of all. In due course his majesty graciously vested his rights in the constituted authorities, otherwise the modern Public.

Now, for so long as the public retains jurisdiction over the highway, the surface is free to whomsoever may choose to travel thereon, provided only that he observe the public rules for such use. But this right is essentially transient, personal and individual. It involves no privilege to interfere with the roadway itself, and it ceases when the individual has personally passed. A man may drive properly without limit over the surface of the road, but he may not leave his wagon to obstruct the passage of others.

THE COMPANY AND THE HIGHWAY.

The Gas Company, on the other hand, requires for the distribution, i. e. conveyance, of its product to the individual citizen of the Public, a practically permanent occupancy of the highway, with a reasonable right to disturb its surface, and theoretically to obstruct travel, and to in other ways, within prescribed measure, exercise that eminent domain possessed in other respects only by the public itself. Wherefore, being a private corporation, yet partaking of public functions, the first gas company became, through this occupancy, and through it only, a quasi-public body.

It is extremely important for us to note this particularly for it was at this point that a Precedent was established. That Precedent lay in the Custom of supplying gas only-of engaging in no voluntary collateral activities and in regarding the accompanying products as undesirable encumbrances in their very terms Byproducts-something aside and Residuals-something left over-all too necessarily true possibly in the early days of the business.

THE COMPANY AND MANUFACTURE.

Thus, having found that the quasi-public powers of the Gas Company pertained only to the occupancy of the highway, we come to the consideration of the next step established by Precedent and which the distances separating gas using centers of population made of easy and natural enforcement by Custom. For inasmuch as this right to occupy the streets would have been of no value without gas to distribute, and inasmuch as it was necessary that each company produce its own supply, there was lost to sight the fact that the manufacture of gas upon private property was not a matter over which the public either did or could exercise any specific authority, or any authority which could properly be any manner bound up with the grant of the use of the highway. For nearly a century gas companies thus confined themselves exclusively to the manufacture and distribution (I can hardly say sale) of gas, wherefore, questions incident to their own adolescence remained dormant and Precedent became firmly entrenched.

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THE BREAKING OF PRECEDENT.

But with the establishment of differential fuel gas rates and the advent of competition in the lighting business, arose the necessity of extensively supplying appliances, of undertaking their installation and care and of realizing more than a Residual value for Byproducts.

Thus escaped from Pandora's box new conceptions of a Gas Company's prerogatives, which I believe will eventually cause all such companies to be regarded, let me again say, as Quasi-PublicService Corporations, in other words, as private corporations giving partly a publicly controlled, and partly a wholly voluntary private service, while yet exercising a measurable degree of public function.

To place this before you perhaps more concretely, I conceive that a gas company, having a franchise or contractual right for the use of the highways; might not itself be possessed of any means of gas manufacture, but might purchase all of its supply of gas from a private corporation delivering the gas to it at the street line of its works.

CO-RELATED FUNCTIONS.

On the other hand, good business would prohibit, and public equity would undoubtedly have a right to demand that such a segregation should not be permitted to oppressive limits. For instance, it would not be within the limits of equity for a gas company to sell out its manufacturing department to a separate corporation composed perhaps of precisely the same stockholders in the same holdings, which secondary corporation would manufacture the gas and then charge the first corporation holding the franchise such an exorbitant price for gas as would necessitate unjust rates. Probably the law of conspiracy could be successfully invoked against such an attempt, certainly the law of competition would be.

And if a gas company therefore manufacture its own gas, we then find that there are certain natural credits accruing in reduction of the cost of the gas, and which credits are the unavoidable byproducts as coke, tar, etc. But at what price should these byproducts be credited to the cost of gas? Should the cost of the retail sale of them in advertising, solicitation, delivery, collection, bad debts, etc., be charged against the gas operation, and the net returns therefrom credited to the cost of gas in the holder, as has been substantially the Custom established by Precedent; or should they be treated in a wholly different manner?

TRUE RESIDUAL CREDITS.

The question brings us at once to the fundamental difference between the existing and a new system of accounting, and face to face with whether or no we shall defy Custom in the interests of Progress. Let us argue with Custom from the two standpoints of accuracy and justice.

In respect of accuracy. The price of tar, of ammonia, and of coke fluctuates 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. Thus, over a series of years, these fluctuations introduce variable multipliers of the several factors entering into the totals of the cost of production. Obviously then as a method, it leads to inaccuracy.

Then as to justice. What is the true credit to be given to the "Gas Operations" through the unavoidable production of accom

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panying products? In my opinion and practice, it is the wholesale price of those products in the company's yard or on tracks—such price as would be paid by any purchaser who would undertake to remove the total product as and in the condition produced, and whether he had immediate use for it or not. 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. And if this be true of so intimate a detail as the so-called Residuals, how much more emphatically so is it of all those dealings taking place under the head of the usual "New Business Department."

APPLIED SEGREGATION.

To realize this in my own practice, under a single corporate head, we have two departments, one "Gas Operations," the other "Merchandising Operations," and for the latter have established a surplus derived from this trading and approximately equal to the value of the merchandising and coke stocks and accounts carried, thereby in effect establishing a like condition to that which would confront a separate organization purchasing the coke as manufactured and carrying on the other voluntary merchandising activities of the company.

Against this "Merchandising Operations" department of the business therefore is charged, each under its individual accounting, all the cost of coke at a price which year by year it is estimated would be the obtainable wholesale price from a contractor for the entire product in the yard. To that debit is added all the cost of advertising, soliciting, billing, collections, bad debts, office rent, and the multitudinous other charges that would confront the ordinary retail coal dealer. To that account is credited the value of the product sold at the selling price.

Similarly do we segregate and account for all such work as the selling of appliances of all kinds, the installation of house piping, lamp maintenance, etc., all in the same manner and to the same extent as closely as it can be segregated, as would apply if a business of selling, installing and maintaining appliances were being independently conducted. In practice this careful and complete segregation has been found to remove completely any temptation to ordinarily sell such appliances at less than a fair profit.