Southwest Washington labor press. [volume] (Hoquiam, Wash.) 19??-19??, 1924-10-10

Al AASs Wcck Issue OF LHG SOutu-
west Washington Labor Press ap-
peared an article by Homer 7. Bone
entitled Financing Public Utilities
Under Private Ownership" Mr..
Bone is either misinformed on the
subject or else he purposely seeks ia
broadcast false information for g
special reason, which we all well I'M
derstand, in the hope tina the win moi
be checked up in his statements. Mr.
Bone says that an allowance cover
ing interest charge on the interest
bearing debt of the utility is sane
toned by law and allowed by the De-
partment Of Public Works in fixing
rates. This statement is false. No
such allowance is contemplated by
law or allowed by the state regula-
tory body. A public utility is per
mitted to earn enough to cover &C.
tual operating expenses, taxes and
depreciation with a reasonable or fair
return on its actual investment, in
addition. Out Of this return the
utility must pay its interest on bonds
and other debts before the stock
holders can receive any dividends.
When an article on a question Of
popular interest appears in news
paper of general circulation under
the name of the author, the reading
public is entitled to presume that the
author of the article is competent to
discuss the subject and that the in
formation contained therein is cor
rect. If the confidence of the public
is violated in this respect the author
either willfully or through ignorance
commits a fraud on his readrs. One
such fraud should be sufficient to dis
credit all his public utterances. On
the other hand, a person having
knowledge of the facts and perceiving
such fraud is equally an offender if
he remains silent and withholds the
truth from the public.
During four and a half years re-
Gently passed, the writer served as
chief engineer of the Department of
Public Works. In this capacity he
had responsible charge of the valua-
ton, rate and service Investigations
for the department handling more
than four hundred such cases during
the period. 1t is, therefore, with
confidence that he is, qualified to con-
tradict Mr.. Bones statements and
present the facts as they actually ex-
list, that he submits this article for
consideration.
Mr.. Bone undertakes to read into
the public service laws a formula
which he says is followed by the De-
partment of Public Works in fixing
rates. No where in the law can such
a formula be found, nor can there be
found anything to suggest such a
formula. The law merely provides
that rates shall be "just, fair, reason
able and sufficient" The law fur
Their provides that when it becomes
necessary for the department to ex-
anime into the rates of any utility
that the rates fixed by the department
shall be such as to "yield a reasonable
compensation"
The law makes no mention of stocks
and bonds, except it requires the de-
partment to ascertain the amount of
stocks and bonds outstanding and re-
port the same as one of large num-
Der of different items which it is re-
quired to find when it makes a valua-
ton of utility property. The amount
of stocks and bonds has no necessary
relation whatever to the value or rate
base found by the department.
1t is thus seen that when rates are
in question the law provides that the
fact to be ascertained is whether they
produce too much, too little or just
enough revenue to "yield a reasonable
compensation" regardless of interest
or dividend requirements. What is
reasonable compensation? For an
swer to this question we must look to
court decisions and to various author
tiles. We find that reasonable com
pensation is had when the rates of a
utility produce a total revenue which
is sufficient to pay operating expenses
(cost of materials, supplies, fuel,
wages and salaries), certain taxes
federal income taxes not allowed by
this state), deposit to a reserve
which will equalize the annual cost
of keeping the property intact and
in good operating condition usually
called depreciation), and fair re-
turn on the value of the property de-
voted to the public service.
"Fair return" is usually expressed
as a percentage of rate base" In
most states utilities are limited to an
eight per cent return except where
unusually skillful management justi-
fies a greater return. Out OF this
fair return the utility must pay all
its interest charges and if there is
anything left it may pay dividends
on stock.
It is seen that the fixing Of a rate
base is a necessary step in rate max
ing. The law requires that the de-
partment find "the fair value of the
property devoted to public service
In order to have the necessary infor-
nation to ascertain such figure the
department, through its engineers
nakes an inventory and appraisal Of
the plant. The prices used in an ap
,nraisal are those which applied to tbs