REMUNERATION TO CITIES FOR FRANCHISE RIGHTS.

BY

BIRD S. COLER.

COMPENSATION FOR MUNICIPAL FRANCHISES.

BY

PROF. C. W. TOOKE.

REMUNERATION TO CITIES FOR FRANCHISE RIGHTS.

BY BIRD S. C O L E R , City Comptroller, New York.

A Paper Read Before the League of American Municipalities, Charleston, S. C , December 12-15, 1900.

COMPENSATION. FOR MUNICIPAL FRANCHISES.

WITH APPENDIX

BY PROF. C. W. T O O K E , University of Illinois, Urbana, 111.

A Paper Read Before the League cf American Municipalities, Charleston, S. C , December 12-15, 1900.

PUBLIC POLICY EDITORIALS. Compensation for Special Uses of Public Rights of Way.. Cpmpensation From and Regulation of Public Service

Corporations.

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CONTENTS.

Public .Policy Editorial:

Compensation for Special Uses of Public Rights of Way i

Remuneration to Cities for Franchise Rights .—Coler . . . . 6

Public Policy Editorial :

Compensation from, and Regulation of Public Service Corporations 13

Compensation for Municipal Franchises.—Tooke 16 Relation to Other Questions 17 Compensation in Cheaper and Better Service 18 Reservation of Right of Regulation 20 Methods of Money Compensation 23 Policy of Money Compensation 23 Objection to Percentage of Net Receipts 24 Percentage of Gross Receipts Practicable 25 Application of . the Method • 28 A Temporary Measure 30 Mandatory Laws Required 31 State Municipal Boards Should Be Established 32

Appendix T.

Constitutional Amendment and Municipal Corpora­tions Act Proposed by the National Municipal League 34

Appendix II .

A Bill to Authorize and Regulate Contracts by and Between Municipalities and Public Service Cor­porations (Ohio) 38

Public Policy Editorial, March p, igoi.

COMPENSATION FOR SPECIAL USES OF PUBLIC RIGHTS O F WAY.

The discussion of the topic, "Remuneration to Cities for Franchise Rights," by Bird S. Coler, comp­troller, New York City, published in this issue, has special interest for the people in many cities in which this subject is a present living issue. This is es­pecially true of the city of Chicago.

Mr. Coler discusses this subject in a clear and force­ful way. His conclusions are in line with the best in­formed thought of the day. He construed his sub­ject as limiting him to the discussion of the best method of securing compensation and did not open the question of low charges without compensation, as against.higher charges with compensation.

He logically concludes, when the principle of com­pensation is accepted as the declared public policy, that the determination of the compensation to be re­quired in any given case should become the subject of a business negotiation between each corporation and the municipality, the terms accepted in one case being no criterion for the terms that may be accepted in another case. His theory is, and it is correct, that each case must be determined upon its individual merits. He therefore suggests that "the local au­thorities can do much better if given a free hand to bargain in behalf of the city than if compelled to sell

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at auction" or to act under the restraint of any other legislative requirement. He adds:

"In saying this, however, I am presupposing that the bargaining power shall be vested in either one official or a board of a very few officials of rather more than the average intelligence and integrity, and upon whom the, responsibility for any abuse of power can be fixed with certainty. This can never be done in the case of local legislative assemblies. In most of our cities the local legislatures do not bear the most enviable, reputations, and even the best of them are so hampered by legislative conditions as to be inefficient administrators."

In this declaration Comptroller Coler confirms the recommendations made in a paper submitted to the first meeting of the League of Illinois Municipalities, March i, 1899, under the title of "How Should the Franchise Question be, Settled?"1 It is there stated:

"In every municipality three men selected for a Board of Municipal Regulation should be the ablest municipal officers in the employment of the people. The duties of their office will acquaint them with exist­ing conditions, the needs and the possibilities of the municipality, and of its inhabitants. To these officers, acting as a Board of Municipal Regulation, all admin­istrative questions pertaining to the construction of works, location of service lines, equipments, charac­ter of service, methods by which a service may be rendered and schedules governing its operation can safely be intrusted. Responsibility for success must be centralized."1 (54-55.)

1. Municipal Public Service Industries, pages 54. 55, 64, 76. Public Policy Publishing Company, Chicago.

The recommendations made in this paper for the determination of prices to users for services rendered and compensation to be required from corporations are based upon a different proposition from any un­der consideration by Comptroller Coler. This propo­sition is that all accounts of the corporation, necessary to the determination of the costs of the service, shall be deemed public accounts and shall be kept in form prescribed by authority of the state and audited by the state. It is then proposed that prices to users shall be determined at cost plus the rate of profit allowed to the corporation by the terms of its contract, and such compensation as the municipal council may de­cide to exact. Further, that prices and compensation so determined shall be fixed for a short period of years, and at the, expiration of each period they shall be again fixed in conformity with the same Require­ments. The proposition is:

"The municipal council should have power to de­termine questions of public policy involved in fixing for periods of five years the, prices at which services shall be rendered to users and the compensation to be paid to the municipality by corporations."1 (64.) ' "By giving the power to determine all engineering and technical details to a Board of Municipal Regu­lation, the most capable officers of municipal govern­ments are placed in position to serve the interests of users and of the municipality to the best of their abil­ity. This city officials cannot now do."1 (76.)

"By giving the power to municipal councils to de­termine price to users and the compensation to be paid to the city, limited only by cost plus a legally de-

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termined and limited profit, municipal councils are placed in position to apportion all advantages equit­ably between users and taxpayers, in accordance with the adopted policy of the people, and to readjust this apportionment at stated intervals of short duration. This city councils cannot now do."1 (76.)

The wisdom of these recommendations is fully at­tested by the testimony of Comptroller Coler in the following statement:

"When the most valuable surface railway franchises in New York were being disposed of there might have existed some extraordinarily far-sighted man who could have foreseen the immense growth of the city and prophesied what their value would be in the fu­ture. But if such a man had been in a position of sufficient authority to demand what he deemed to be an adequate compensation, the. promoters of the rail­way enterprises would have stood aghast at his fig­ures. The railroads would simply never have been built, and if the railroads had not been built, the growth of the city would have been stunted and the, prophet would have stood discredited."

It is no more possible now than it was thirty-five )rears ago for any man or set of men to pre-determine for that period of time a rate of charges for services to be rendered to the public and to private users, and for compensation for special uses of public rights of way, that will be best for the public welfare and just to the capital invested. It will be accepted as an unquestioned proposition that those, who urge such an adjustment do it because they believe their inside knowledge of operating facts will enable them to get

D

the best of the, bargain. There can be no sound pub­lic or private reason for not agreeing to a proposition that will secure service for users, at cost plus a rea­sonable profit, and for investors a monopoly of the business and a reasonable profit on a bona fide invest­ment, an adjustment of price to be made for com­paratively short periods and the contract to continue for thirty-five or fifty years. This will not require prophetic vision, only an accurate knowledge of past conditions, nor will it stunt the growth of the city, because all the capital necessary will be willingly in­vested on these terms.

REMUNERATION TO CITIES FOR FRAN­CHISE RIGHTS.*

BY B I R D S. COLER, CITY C O M P T R O L L E R , N E W YORK.

The topic which I find myself called on to discuss is: What remuneration, if any, should be exacted from light, water, street railway, telephone and sub­way corporations and how should it be collected?

This title naturally excludes from discussion all questions relating to municipal operation of fran­chises ; it presupposes that such franchises are to be privately operated and contemplates consideration only of the terms upon which the grants should be made.

What is rather loosely termed "municipal owner­ship" is now, so far as it relates to franchises involv­ing the use of city streets, scarcely to be regarded as debatable ground. On the subject of municipal op­eration, however, there is much to be said for and against, and I am glad, therefore, to have to deal, within the limits of this short paper, with the simpler problem.

I take it for granted that no one will now dispute the proposition that the public should receive re­muneration in one way or another for the use of its streets by private corporations. The only question is: How can that remuneration be most justly ex­acted and most successfully collected ?

* A p'aner before the League of American Municipalties, Charleston, S. C , December 12-1?, 1900.

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The city of New York has for over two hundred years been dealing with this problem with greater or less success—generally with less. It began leasing its ferry franchises in 1674 and twelve years later its right to control such pivileges was confirmed by the famous Dongan charter.

The granting of franchises for street surface rail­roads in New York belongs to the history of the last fifty years. During the first half of this period these grants were made directly by the State Legis­lature, generally without any provision for compen­sation and always without adequate provision. Un­fortunately the most valuable of these franchises were thus disposed of during this time.

The constitutional amendment of 1874 called for the action of the local municipal authorities, and in 18S4 a general law of the state provided for the sale of all such franchises at public auction to the high­est bidder, and prescribed a minimum, or upset price, of 3 per cent of the gross receipts during the first five years of operation and 5 per cent thereafter.

Compensation for sub-surface rights, such as those enjoyed by telephone, telegraph, gas, electric light and power, steam heating, refrigerating and other subway corporations, has received scarcely any intel­ligent consideration. In fact, the great value of some of the franchises in a great metropolis like New York has only during the last few years attracted any popu­lar attention whatever.

In my judgment the most important point to em­phasize in regard to this subject is that, no matter what the method of exacting compensation may be, it

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is practically impossible for municipal authorities to make any bargain with a private company which will not appear inadequate to the next succeeding gener­ation. When the most valuable surface railway fran­chises in New York were being disposed of, there might have existed some extraordinarily far-sighted man who could have foreseen the immense growth of the city and prophesied what their value would be in the future. But if such a man had been in a posi­tion of sufficient authority to demand what he deemed to be an adequate compensation, the promoters of the railway enterprises would have stood aghast at his figures. The railroads' would simply never have been built. And if the railroads had not been built the growth of the city would have been stunted and the prophet would have stood discredited. Here lies the problem then. On the one hand, not to dis­courage enterprising capital, and on the other hand to place some limit on its profits. Now, if the city makes a poor bargain, but that bargain has only, say, twenty-five years to run, there is no great harm done; for twenty-five years is as nothing in the life of a great city. But if a franchise be granted in per­petuity of for a very long period—like that of the New York and Harlem company, which runs until the year 2389—no matter how advantageous the bar­gain may seem to-day it is likely to appear quite ridiculous a hundred years from now. Short terms for franchises are, therefore, the most important thing. If that principle be strictly adhered to more than half the fight is won.

As to the methods of exacting compensation, I

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fear that we suffer somewhat from too much devotion to theories, logic and philosophy. There is no one method which will best fit all cases. There are ad­vocates of the principle of exciting competition by offering franchises for sale at public auction. Others believe in a legislative fixation of arbitrary amounts either by way of cash payments or percentages on gross or net receipts. Still others believe in granting to local authorities a certain freedom of barter in arranging terms with those seeking to obtain fran­chises. On the whole, I favor the last-mentioned course, though there are conditions twider which it is not desirable.

I think it likely that in the case of a comparatively small, but growing, city, where practically no trans­portation facilities exist, the method of franchise sale at public auction, with a fixed minimum or upset price, might work well. But where, in large cities like New York, the chief thoroughfares are already pre-empted; where the existing surface lines are con­trolled by a monopoly; where the question of trans­fer facilities practically rules out all newcomers, there can be no such thing as genuine competition. In such cases the local authorities can do much better if given a free hand to bargain in behalf of the city than if compelled to sell at auction. In saying this, however, I am presupposing that the bargaining power shall be vested in either one official or a board of a very few officials of rather more than the average intelligence and integrity, and upon whom the re­sponsibility for any abuse of power can be fixed with certainty. This can never be done in the case of

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local legislative assemblies. In most of our cities the local legislatures do not bear the most enviable reputations, and even the best of them are so ham­pered by legislative conditions as to be inefficient ad­ministrators.

Under the provisions of the greater New York charter the local legislature, it is true, possesses ex­clusive power to grant such franchises, but it is pro­vided that any ordinance granting such a franchise "shall on its introduction and first reading be referred by the municipal assembly to the board of estimate and apportionment, who shall make inquiry as to the money value of the franchise or privilege proposed to be granted, and the adequacy of the compensation proposed to be paid therefor, and no grant thereof by the municipal assembly shall be made except ^on terms .approved by vote or resolution of the board of estimate and apportionment."

The practical effect of this provision is to leave to the popular legislative body the power to decide the broad question of whether the public interests demand the granting of a franchise, and also to veto the terms proposed by the board of estimate and apportionment, but the latter board is vested with those powers which may be said to relate to the business or commercial aspect of the proposition.

As the board of estimate and apportionment in the city of New York has always been a more or less efficient body, which has through all the changes of administration generally retained the confidence of the public, this scheme is one which has generally

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commended itself to s tudents of New York City mu­nicipal affairs.

Since the Greater New Y@rk consolidation only two gran t s of franchises have been made under this provision, but the te rms of the gran ts have been de­cidedly bet ter than those which had previously been obtained by operat ion of the general railroad law requir ing sales of such franchises at public auction.

On December 5, 1899, the board of estimate and appor t ionment fixed the money value of the fran­chises sought by the Kingsbr idge Railway Company and the F o r t George & Eleventh Avenue Railroad Company as follows :

Four per cent of the gross receipts during the first five years of operation.

Six per cent during the second five years. Eight per cent during" the third five years, and Ten per cent during the remaining ten years.

, These two franchises affected routes in compara-tively undeveloped portions of the city, so that t he operation of these railroads will probably not be profitable in the beginning. Nevertheless, before the expiration of the twenty-five year term of the grant it is practically certain that the city will be thickly settled in these localities, and at the end of the term the city will be free to fix new rates of compensation.

It seems to me that such a plan as this comes as nearly as possible to the ideal method of exacting compensation for street railway franchises otherwise than municipal ownership and operation.

There are many important cities of the country which do not possess boards similar in composition

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to the board of estimate and apportionment, but I know of no reason why in such cases the functions performed in the city of New York by the board of estimate and apportionment should not be per­formed by either the mayor or comptroller of such cities, acting either alone or together. The principal thing is to have the business transaction connected with the granting of such franchise conducted on behalf of the city by the highest type of official possible, and to center the responsibilities so that there can be no escape in case the terms of the grant be manifestly improper. I think it is under such conditions that the best- solution of this problem is to be found.—Municipal Engineering, Indianapolis, January, 1901.

Public Policy Editorial, March 23, 1901.

COMPENSATION FROM AND REGULATION OF PUBLIC SERVICE CORPORATIONS.

It argues well for a correct settlement of these vexed questions when organizations like the League of Amer­ican Municipalities secure for their information such papers as that by Bird S. Coler, Comptroller of New York City, published in our issue for March 9, 1901, and by Prof. C. W. Tooke of the University of Illi­nois, published in this issue.

The question of compensation for special uses of public rights of way is exceedingly difficult of solu­tion when both parties to the contract are equally in-sistant upon wanting to demand or receive only that which is right and just. But when one party or the other, relying upon inside information, or upon the arbitrary power of government, seeks, and is willing, to profit by an unfair solution of the question, it be­comes exceedingly complex. It will also be clearly seen that the longer the, period is* for which compensia-tion is to be determined the more difficult it is for either party to calculate accurately the value of the con­cession.

Compensation inevitably involves the question of rates and quality of service. One cannot be intelli­gently determined without reference to the other. In the past these questions have been dealt with entirely as questions of expediency. No attempt has been made to enact laws based on fundamental principles that

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would be a universal and unvarying guide to the deal­ings of municipalities with corporations, and to the courts in administering justice, making their decisions the pronouncements of real justice in protection of all public and private interests involved. Every com­pensation fixed, every attempt at regulation by law has been the result of blind fiat by state legislatures or municipal authorities exercising arbitrary power without a correct and adequate knowledge of facts. Coupled with this defect is its . twin sister in uncer­tainty, declaring the enactment subject to change at the option of the legislative authority by which it was en­acted.

The decisions of courts are rendered according to law. While the courts have unhesitatingly and un­ceasingly declared that regulations and rates established by law or ordinance must be reasonable, that the power of government cannot be arbitrarily exercised, but must conform to the requirements of justice, and that the determination of reasonable regulations and rates must result from judicial investigation, not arbitrary enactments, no state legislature has enacted a law pro­viding for securing a complete knowledge of facts for the benefit of the people and prescribing a rule of ac­tion by mieans of which just regulations and reasonable rates can be determined and established.

The uncertainty of franchise conditions, the long and expensive litigation resulting from an arbitrary exercise of legislative power, involving the basis upon which corporations were conducting their business in more or less uncertainty have been as disastrous to the best interests of the people as to corporations. It

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has been the cause of the two evils from which the greatest damage to the general welfare has come; un­necessarily high rates and the drawing of corporate interests into politics to seek self-protection and undue advantages. These evils cannot be remedied by iso­lated or individual action. They require uprooting by a general law that shall declare how a reasonable rate shall be determined and require the investigation that will enable those whose duty it is to determine such a rate in accordance with the requirements of justice. Such a law will definitely and permanently settle all questions as to duration and scope of franchises, taxa­tion or compensation, rates to be charged for services rendered and the character of the service. The settle­ment will be permanent because it will be just to the people and to public service corporations.

COMPENSATION FOR MUNICIPAL FRAN­CHISES.1

BY PROF. C. W. TOOKE, UNIVERSITY OF ILLINOIS,

URBANA, ILL.

THE PROBLEM STATED.

The franchise question is the strategic point around which battle for good and efficient municipal govern­ment is being waged. In its ultimate issue it includes the determination of the contest now being carried on between the advocates of private and of municipal ownership. Its solution involves, also, that other very practical problem of an adjustment of the meth­ods of state taxation so that the provisions in our constitutions and statutes relative to the financial powers of municipal corporations may be rendered fairly operative. But underlying the various issues that may be involved is the one essential purpose to which the people of our cities are now awake ; namely, that of securing to our municipalities a proper and just compensation, either in public service, or in re­duced taxation, for the valuable privileges of sup­plying their inhabitants with the great necessities of modern urban life. The time was, and not in the remote past, when the ignorance of our people as to the value of these franchises opened an opportunity

(1) A paper read before the League of American Municipalities at its fourth annual meeting, held in Charleston, S. C, Dee. 12-15, 1900.

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for large compensation to be made by the promoter whose foresight and energy were successfully directed to this field. The, day has come, however, when we know the value of these public privileges, when we realize our political responsibility to our constituents invthis matter, and the difficulty that now confronts us is that of determining the best practical methods of securing proper compensation therefor. In some form or other the public demands that the best com­pensation under existing contracts be secured from corporations to which grants have already been made, and that no new franchises shall be granted unless provision is made for safeguarding the rights of the people by obtaining, either in the form of service or in money, an equivalent consideration.

RELATION TO OTHER QUESTIONS.

The immediate question under consideration is one that involves at once every policy of government that is to be applied to our cities. The laws of taxa­tion, both constitutional and statutory, have their di­rect bearing on the problem. The burning question of municipal ownership, also, is indirectly involved. I may admit at the start that I realize that tliis ques­tion cannot be solved on its own merits independently of its relation to these other questions. My intention, however, is to keep the, discussion as free from these other related issues as possible, and to refer to them only when required for the purpose of maintaining a proper perspective. The, mooted question of the relative merits of municipal or private ownership, for example, I wish to be eliminated from this discus-

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sion. The city which has the legal power and the financial ability to venture upon municipal owner­ship is in a good position to secure similar advantages under either method. But for the majority of our cities, which are hampered-by constitutional limita­tions upon their powers of taxation and indebtedness, which from one cause or another, at present are ab­solutely precluded from taking refuge in municipal ownership, the question under discussion is not only pertinent, but inevitable, and must be. solved by them to-day without reference to the theoretical views upon the desirability of public ownership.

COMPENSATION IN CHEAPER AND BETTER SERVICE.

The methods of compensation that are advanced by authorities upon this subject may be grouped under two main heads, based upon the distinction whether the compensation be in the form of money paid into the city treasury by the corpora­tion, or in the form of cheaper service to the public. These two methods are not necessarily inconsistent, although each has its adherents who advocate the exclusion of the, other method. For the sake of convenience, however, I shall consider them separately, and first direct your attention to the method of compensation by securing to the pub­lic cheaper and better service.

On the theoretical side, the burden of argument seems to favor this method. Not only is the public entitled to the best and cheapest service possible, but the economic advantage of extending the service, and the political advantage of arousing an active public

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interest; which shall help to hold our public' service corporations under a proper control, both lend their weight in its favor. As the argument was recently stated in reference to street railways by one of our able authorities on municipal government—"High charges and large compensation to the city assists ihe taxpayer at the expense of the traveling public. By so doing the city not only indirectly taxes those least able to bear the burden, but it stimulates over­crowding and prevents workmen from removing to the suburbs where they can be, better housed and secure more light and pure air. On the other hand, the taxpayer is entitled to no decrease in taxes be­cause a street car line is built. Instead of imposing a burden upon him, it makes his property more valu­able. As a taxpayer, he has not contributed one iota to making street railways either possible or desirable, whereas the laboring men, who use the street rail­ways constantly, have created a demand for street railways and have' made their maintenance pos­sible."1

On the practical side, however, we can readily see the difficulty of applying this niethod under a system of private ownership. The day may come when through the oversight of an efficient state board of control, such a result may be obtained by the mere reservation in the grant of the franchise of a power of control as to rates and service. But, unhappily, as I shall proceed to point out, the power to regu­late, even when reserved in the contract with a pri-

(1) Milo R. Maltbie in letter to Street Railway Commission of Chicago, Nov. 1, 1900.

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vate company, can be exercised under our present law only with difficulty and very seldom with marked success. So that the, only alternative that is left is a determination in detail in the franchise itself of the rates to be charged, a method which one can readily see may be quite as difficult of application, because of the impossibilty of foreseing the changes in local conditions which the future may bring forth.

• R E S E R V A T I O N O F R I G H T O F R E G U L A T I O N .

The force of this argument can be more readily appreciated, I believe, when we consider the legal difficulties that surround any attempt to regulate the rates of such public service corporations. I do not wish to be understood as in any sense opposing such regulation, for I believe that every corporation which receives special powers should be made sub­ject to an oversight and regulation in this respect, but. I desire to show that such rights of oversight and regulation should be specifically reserved in the grant and that some proper method must be devised to render the exercise pi those rights at once* just and efficient.

It is sometimes said that this right to regulate the rates of public service corporations is impliedly reserved in every grant by the state and that, inde­pendently of a specific reservation in the consti­tution or in the statute, the state may, through itself or through its agencies under its police power, exer­cise a control in this respect.1 Thus in the celebrated

(1) See Buffalo East Side R. R. Co. vs. Buffalo Street R. R. Co.; I l l K. Y. 132.

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case of Munn vs. Illinois (94 V. S., 124) the Su­preme Court of the United States laid down the gen­eral principle that "when an employment or busi­ness becomes a matter of such public interest and importance as to create, a common charge or bur­den upon the citizen; in other words, when it be­comes a practical monopoly, to which the citizen is compelled to resort and by means of which a tribute can be exacted from the community, it is subject to regulation by the executive power."1 But the court has since held that this right cannot be arbitrarily exercised by the Legislature, but that it is a sub­ject for judicial investigation as to the reasonable­ness of the regulation requiring due process of law for its determination.2

So, also, it may well be doubted if the court would to-day hold that under the police power the state has an implied right to regulate, the rates to be charged by a company operating under a fran­chise that fixes the charges to be imposed for pub­lic service. As late as in August of the year 1900 the United States Circuit Court of the Southern Dis­trict of California held that under the franchise of the Los Angeles Water Company, granted in 1868, the state had no right to reduce the rates of charge fixed by that franchise, on the ground that it impaired the obligation, of a contract3 _ We shall not enter upon the question whether it is not possible, to evade the limitations imposed by the federal constitution,

(1) Justice Bradlev in Sinking Fund Case; 99 V S. 747. (2) Chicago, Etc., R. R. Co. vs. Minnesota; 134 V. S. 418. (3) Los Angeles City Water Co. vs. City of Los Angeles: 103 Fed.

Rep. 711.

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but upon the principle that it is always best to frame our laws within a safe margin of constitutionality, the reservation of this right should be expressly set forth in every franchise to include regulation, but also by any other method that the state legislature may subsequently provide.

Further it may be observed that the present method of regulation which obtains in some of our states, under which in the first instance rates may be fixed by the action of the municipal council, has proven most unsatisfactory in operation. In the state of Illinois, for example, where a reservation of the right to regulate rates is incorporated in the general corporation act1 and the validity o;f a statute delega­ting the power to fix rates for a supply of water has been sustained,2 every company which accepts a fran­chise finds itself subject to this indefinite control. For while in the last instance the reasonableness of the rates imposed is a question for judicial determina­tion, the arbitrary action of a city council may at any time subject the corporation to a long and ex­pensive litigation with all the evils attendant upon a temporary cloud on its contract rates. Conse­quently, the company has before it the necessity of submitting to this" litigation or the alternative of entering city politics for the purpose of self-protec­tion. To the city; also, which calls for bids for a franchise, the method works the evil of practically

(1) Sec. 9. "The General Assembly shall at all times have power to prescribe such regulations and provisions as it may deem advisable, which regulations and provisions shall be binding under any and all corpora­tions found under the provisions of this act.' ' 1 Starr &, Curtis Statutes, 2d Ed., p. 1006.

(2) City of Danville vs. Danville Water Company; 178 111. 299.

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compelling the municipality to pay higher rates be­cause of the insecurity of the prices agreed upon.

POLICY OF MONEY COMPENSATION.

It is because of these practical difficulties under our present laws in controlling the rates for service so that they may be adjusted to progressive condi­tions, that some of us who believe in the theory of compensation by more efficient and cheaper serv­ice have been led to advocate, also, as a practical measure, compensation by the payment of money into the city treasury, to be determined according to the terms of the franchise.

Our position is further reinforced by the fact that many of our cities, because of the defective operation of constitutional limitations upon their powers of taxation and indebtedness, can neither build nor pur­chase plants of their own, nor raise sufficient money by taxation to reduce their indebtedness below the limit so as to make public ownership feasible. Only by exacting a money compensation for franchises can they build up a fund for ultimate ownership, and thus supply to their citizens the service required in every modern municipality.

METHODS OF MONEY COMPENSATION.

The methods of money compensation which are applied are either by specific charges, such as a tax1 of

(1) While the writer uses the word "tax" in this connection, he believes that the word "fee" is more appropriate. The ques­tion of taxation of quasi-public corporations should be eliminated from a discussion of the question of compensation for use of the streets. Taxes should be imposed on such corporations as upon other corporations and should not be confused with the payments made for special privileges.

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a certain amount upon street railroads for each car operated, or by exacting a percentage of the receipts of the company. Thus the city of Minneapolis se­cures $25 each per annum on the average number of cars operated, a tax which brought into the, treas­ury $4,250 for the fiscal year of 1899. The city of St. Paul secured for the same year by a similar tax of $10 per car $1,810, besides which some $3,-063.48 was received from the company by a gross receipts tax. This method of taxation of street rail­roads is followed in several other of our cities and no objection can be made to it, provided it be not substituted for other and better means of compen­sation which we.shall mention later. In the city of Omaha the gas company pays into the city treasury five cents for every 1,000 cubic feet of gas sold to private consumers each year. This franchise has been in operation some six years and the premiums turned into the city treasury have aggregated from $6,000 to $11,000 a year.1

OBJECTION TO P E R C E N T A G E OF, N E T R E C E I F T S .

But of far greater importance is the method of re­quiring a percentage of the gross receipts of the. company in return for franchise privileges. The ob­jection to requiring a percentage of the net receipts is obvious and is illustrated in the case of the rela­tions of the street railroad company of Des Moines to the municipality. The street railroad franchise provides that the city shall receive 5 per cent of

(1) For fiscal year 1899 the amount was $11,890.64.

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the net receipts of the company. "We have never," writes ex-Mayor McVicar, "profited by this provi­sion, for the reason that an excessive, bonded debt, which has been systematically increased from year to year, absorbs all the profits of the company. The value of the plant at a fair estimate is $700,000, while the bonded debt is $1,200,000, placed at 6 per cent."1

PERCENTAGE OF GROSS RECEIPTS PRACTICABLE.

A percentage of the gross receipts of public service companies, however, has been found to be a practical method of compensation. An examination of the various cities which, have, this method in successful operation would take considerable time, but I may say that the uniform testimony of the officials of the various cities who have been kind enough to report on this question is in favor of this method. I may be permitted to cite' in brief the, experience of the city of Providence, which is given the right ^by the Legislature to grant franchises in its streets at a minimum and maximum rate, the former being 3 per cent and the latter 5 per cent of the gross earn­ings of the corporation. For the year ending Sep­tember 30, 1900, the gas company paid into the treas­ury $55,254.57, the electric lighting company §27,-548.78, the street railway company $51,523.08, and the telephone company $8,625.60, a grand total of $112,992.03, a showing extremely favorable in con­trast to that made by the city of Chicago, which has received for the current year, from January 1 to date, only $345,738.43 from the various corpora-

(1) Personal letter to the writer.

2(5

tions which enjoy the valuable rights in the streets of that city.

Of other cities where this method is in successful operation, I may mention that the city of Newark, in­dependently of state legislation,'has in two instances secured compensation from such franchises, from the trolley company 5 per cent of the gross receipts, and from a telephone company 2 per cent. One street railroad company of Toledo has contracted to pay into the treasury 1 per cent of its gross receipts in addition to valuable concessions as to charges for service. The White charter of the city of Syra­cuse requires that every franchise shall be sold at public auction at a minimum remuneration of 2 per cent of the gross receipts of the company accepting the same. The charter of the city of Seattle con­tains a similar provision. The new charter of the city of St. Paul, which went into effect June 1, 1900, prohibits the city from granting any franchise for a longer period than twenty-five years, and calls for a 3 per cent gross earnings tax in every case. The city of Buffalo, under an agreement made with the street railroad companies of that city January 1, 1892, exacts a gross earnings tax of 2 per cent when the receipts are less than $1,500,000, of 2*4 per cent when the receipts are over that amount and less than $2,000,000. The various companies have re­cently been consolidated and it is estimated that hereafter they will pay into the treasury, on the 3 per cent basis, something over $60,000 per annum.

Of more recent franchises I may mention that of the gas company of the. city of Nashville, which went

27

into operation May i, 1900. The company has bound itself to pay into the city treasury 5 per cent of the gross income, which for the first eight months amounted to $5,441.75. In addition to this amount, the company pays into the city treasury an ad valorem tax of 15 mills on an assessed valuation of $900,000, or $13,500 per annum, in addition to a privilege tax of $700. The new charter of the city and county of San Francisco, which went into operation January 8, 1900, makes a provision for the letting of the street railway franchises to the highest responsible bidder for a term not exceeding twenty-five years with the reservation of a remuneration that shall be at least 3 per cent of the gross receipts during the first five years, 4 per cent during the next succeeding ten years, and 5 per cent during the. remainder of the period.1

Of mandatory statutes of a general nature on this subject I may refer to the New York railroad law of 1890 (Ch. 565, of laws of 1890, sections 93-95), by which it was provided that all franchises for the opera­tion of street railroads in cities of more than 90,000 inhabitants should be sold at public auction. By an amendment of 1892 (Ch. 676, laws of 1892) the application of this law was limited to cities of 1,250,000 inhabitants, but it was provided that in any incorporated city or village the local authorities might require the payment annually of not exceed­ing 3 per cent of face gross receipts of any street surface railroad as a consideration of granting con-

(1) See Charter, pages 14-15.

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sent to the construction, operation or extension of such railroad.

The General Assembly of the state of Missouri passed an act in 1895 (session laws, 1895, page 53) pro­viding for the. sale at public auction of all grants or franchises by any county, city, village or other mu­nicipal corporation for permission to occupy space in the public streets or public places by any electric or gas lighting plant, street railway, telephone or tel­egraph plant or plant for supplying water. The act required as a condition precedent to the granting of consent by any of the political subdivisions above named, of the occupancy of the streets, alleys, roads, squares or other public places, that the franchise or privilege be sold at such auction to the responsible person who would give yearly the larg­est percentage of the gross receipts derived from such occupancy and use, with adequate security for the payment therefor. Unfortunately, the compen­sation measure was declared unconstitutional by the Supreme Court of the state because the provisions of the act were too indefinite to enable, the courts to carry out their directions.

APPLICATION OF THIS METHOD.

If this method of compensation is to be applied in the granting of. a franchise,"the municipality should call for bids upon this basis, a fair minimum per­centage being established. The time of the fran­chise should be limited to a definite term, as twenty-one years,1 and further, a provision should be in-

(1) This is the recommendation of the Committee of the National Municipal League. See Appendix^!.

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corporated giving the city the option of purchasing the plant at stated intervals at an appraised valua­tion, which shall not take into consideration the value of the franchise itself. If thought desirable, the income from this source could be applied to a sinking fund, to be held inviolable for the final pur­chase of the plant.1 Further, I believe that it is better to refrain from imposing other requirements, as to paving or street cleaning, upon corporations using the streets in lieu of cash compensation, because the practice makes it impossible to determine the actual compensation, and because the municipality should have a free hand in such work. The methgd of compensation by a percentage of the gross re­ceipts, therefore, under the, limitations stated, seems to me to be at once practicable and defensible upon sound principles. No other method of compensation seems to have so great an advantage, of simplicity, and in case of its application it gives us a valid basis for purposes of comparison between different cities-— one that is easily comprehended by the citizens of ordinary intelligence.

That the reservation of a percentage of the gross receipts as compensation for franchise privileges un­der the limitations suggested does not necessarily imply an abandonment of the principle of compen­sation in cheaper and better service has been asserted at an earlier point. I have not the, time to enter upon a discussion of this phase of the question, but

(1) See the valuable article by Mr. Marcus Lane, of Freeport, 111., which advances a method for the gradual purchase of such plants. Pub­lic Policy, August 11, 1900.

30

I may bring to your notice a concrete illustration of the fact that in certain cases it is neither incon­sistent nor self-contradictory to conserve at once the interests of the city treasury and of the con­sumer. The gas franchise of the city of Nashville, to which reference has already been made, in addi­tion to securing a liberal return to the city, fixes a maximum rate of $i per thousand feet of gas, a re­duction of 50 cents per thousand from the previously established rate.

A T E M P O R A R Y M E A S U R E .

The application of this or any other method of compensation must, of course, depend largely upon local conditions. Moreover, while it is a prac­tical, it cannot be regarded as a permanent, solution of the question. Ultimately, either municipal own­ership may be preferable, or if private ownership is to obtain, a method of compensation similar to that proposed by the Ohio Legislature at its last session (1900) may be accepted. This proposition, prepared by Mr. Allen Ripley Foote of Chicago, provides that all earnings of private companies over and above the true cost are to be regarded as profits. Of these profits a private company is to be allowed to pay upon its true, investment a rate per cent double that paid by the municipality on its bonds, all surplus profits to be divided equally between the munici­pality and the company.1 If the local conditions de­mand compensation in reduced rates, the recom-

(1) See Public Policy, August 18, 1900, page 101. Also see Appendix 2.

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mendation of the municipal commission of Baltimore may meet with approval. This recommendation, in addition to a reservation to the city of a percentage of the gross profits, calls for a limitation of the maximum profits to be earned by the private com­pany, and a reduction of charges for services when the profits exceed the. maximum fixed.

MANDATORY LAWS REQUIRED.

While the method of compensation above advo­cated may be a temporary expedient, and while it may be applied by the officials of a given city who unite intelligence, honesty and force, it is my opin­ion that in the interval which must precede the in­troduction of more ideal methods of compensation, provision for a gross receipts tax may well be se­cured in some of our states by the enactment of man­datory statutes. The need of such an enactment is to be determined largely by the local conditions re­ferred to above, but in certain states these condi­tions apply with similar force to all the cities. It therefore becomes a question of general public pol­icy and is a fit subject for state legislation. With­out such mandatory legislation, many of our cities that may seek to get the best returns for the use of their streets will be unable, either through the incompetence or lack of energy of their officials, to make satisfactory arrangements in this matter. In fact, competent and energetic officials are often un­able to accomplish this end when pitted against the expert talent and experienced wisdom enlisted on the side of the private corporations.

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STATE MUNICIPAL BOARDS SHOULD BE ESTABLISHED.

In closing this inadequate presentation of so im­portant a question, I may be pardoned, I trust, in calling your attention once again to a movement in advocacy of which as a practical measure, of munici­pal progress one can scarcely speak too strongly at the present time. I refer to the establishment of state boards of municipal control. My personal views on this matter were incorporated in a paper read before the last annual meeting of this league, but I desire to reaffirm the opinion that is held by many authorities on municipal government, that no other measure of state legislation can be of more timely importance. . In relation to the subject under discussion, whether state laws require compensation for municipal franchises or not, the advice of a board of experts would be invaluable to the officers of any city, large or small, who have imposed upon them the duty of safeguarding the rights of the people in granting franchises for the use of the public streets. If the right to regulate the rates for service is to be reserved, it is clear that this duty can be effectively carried out neither by the state Legislature, nor by the city council. If the, profits of public service in­dustries are to be adequately determined, so that they may form a basis for valid comparison, this desired result can be brought about only by a uni­form system of accounting under state supervision. If our smaller cities are, expected to make contracts, under which a proper supervision can be exercised over public service corporations, so as to protect the'rights of the public against inordinate private

33

greed, this expectation may never be realized unless they act under the advice or control of such a supe­rior body. For the protection also of the interests of private corporations operating under municipal franchises, the right of regulation and of supervision should be, placed in competent hands. Thus only may we correct the evils which we recognize in the relations of public service companies with our mu­nicipalities, evils which arise in no small degree from the arbitrary and inelastic methods of control which are. now exercised, and which have driven our pub­lic service corporations for self-protection to carry their commercial policies into municipal and state politics. It is gratifying to note that among those who are advocating the establishment of such a board are many of the leading supporters of the principle of private ownership. Let the forces in favor of bet­ter municipal government unite upon this issue, and we may look with confidence to a solution of the franchise question upon the only basis conformable with American traditions and American institutions, upon a basis of special privilege to none, but at the same time of absolute justice to all.

APPENDIX I.

Constitutional Amendment and Municipal Corporations Act Proposed by the National Municipal League Committee on Municipal Program, 1899.

PROVISIONS RELATING TO FRANCHISES.

Constitutional Amendment.

ARTICLE SECOND.

The Legislature shall not pass a private or local bill granting to any private corporation, association, or individual, any exclusive privilege, immunity, or fran­chise whatever.

ARTICLE THIRD.

Section I. The rights of every city now existing or hereafter created within the state, in and to its water front, ferries, wharf property, land under water, pub­lic landings, wharves, docks, streets, avenues, parks, bridges, and all other public places, are hereby de­clared to be inalienable, except by a four-fifths vote of all the members elected to the Council, approved by the Mayor; and no franchise or right to use the same, either on, through, across, under or over, and no other franchise granted by a city shall be for a longer period than twenty-one years to any private corporation, as­sociation, or individual. Such grant or any contract

34

35

in pursuance thereof may provide that upon the ter­mination of the grant the plant, as well as the property, if any, of the grantee in the streets, avenues and other public places shall thereupon, without further or other compensation to the grantee, or upon the payment of a fair valuation thereof, be and become the property of the city; but the grantee shall be entitled to no payment because of any valuation derived from the franchise. Every grant shall specify the mode of determining any valuation therein provided for, and shall make adequate provision by way of forfeiture of the grant, or otherwise, to secure efficiency of pub­lic service at reasonable rates, and the maintenance of the property in good order throughout the term of the grant. Every grantee of such franchises or rights to use shall keep books of accounts and make stated quarterly reports to the financial department of the city, which shall contain an accurate statement in sum­marized form and in detail of all its financial receipts from all sources, and all expenditures for all purposes, together with a full statement of its assets and debts, as well as such other information as to the financial condition of such grantee as said department may re­quire, and said department may inspect and examine, or cause to be inspected and examined, at all reason­able hours, any books of account of such grantee.

M U N I C I P A L CORPORATION ACT ARTICLE I I .

Sec. io. Street and Other Franchises.—-The rights of the city in and to its water front, ferries, wharf property, land under water, public landings, wharves,

36

docks, streets, avenues, parks, bridges and all other public places are hereby declared to be inalienable, except by a four-fifths vote of all the members elected to the Council, approved by the Mayor; and no fran­chise or right to use the same, either on, through, across, under, or over, and no other franchise granted by the city shall be granted for a longer period than twenty-one years to any private corporation, associa­tion, or individual; and, in addition to any other form of compensation, the grantee shall pay annually a sum- of money, based in amount upon its gross receipts, to the city. Such grant and any contract in pursuance thereof may provide that upon the termination of the grant the plant, as well as the property, if any, of the grantee, in the streets, avenues and other public places, shall thereupon, without further or other compensation to the grantee, or upon the payment of a fair valua­tion thereof, be and become the property of the city, but the grantee shall be entitled to no payment be­cause of any valuation derived from the franchise. Every grant shall specify the mode of determining any valuation therein provided for, and shall make adequate provision by way of forfeiture of the grant or otherwise to secure efficiency of public service at reasonable rates and the maintenance of the property in good order throughout the term of the grant. Every grantee of a franchise from the city rendering a service to be paid for wholly or in part by payments by users of such service shall keep books of accounts and make stated quarterly reports in writing to the Gity Comptroller, which shall contain an accurate

37

statement, in summarized form and also in detail, of all its financial receipts from all sources and all ex­penditures for all purposes, together with a full state­ment, of its assets and debts, as well as such other information as to the financial condition of such grantee as the City Comptroller may require. Such reports shall be public records, and shall be printed as a part of the annual report of the City Comptroller, and said Comptroller may inspect and examine, or cause to be inspected and examined, at all reasonable hours, any books of account of such grantee. Such books of ac­counts shall be kept and such reports made in accord­ance with forms and methods prescribed by the City Comptroller, which, so far as practicable,' shall be uni­form for all such grantees.

The city may, if it deems proper, acquire or con­struct, and may also operate on its own account, and may regulate or prohibit the construction or operation of railroads or other means of transit or transporta­tion and methods for the production or transmission of heat, light, electricity, or other power, in any of their forms, by pipes, wires or other means.

APPENDIX II.

y^th General Assembly Ohio, Regular Session. House Bill No. 865.

Mr. Heywood:—

A BILL

To authorize and regulate contracts by and between municipalities and public service corporations. Be it enacted by the General Assembly of the state

of Ohio:— Sec. 5. Limitation on Corporation Profits.—The

share of profit of a contracting corporation shall be limited to an amount equal to the product of a rate per cent twice the rate per cent paid by the munici­pality on its bonded debt, computed on the full amount of investment, plus its share of a divisible surplus profit, as provided in section 9 of this act.

Sec. 6. Profit-sharing with Employes.—A contract­ing corporation may adopt a system of profit-sharing with its emlployes, in which case it shall be entitled to earn and to pay to employes the same rate per cent upon the wages earned by them as it earns on its investment.

Sec. 7. Compensation to the Municipality.—The municipal council shall fix the compensation that shall be paid to the municipality annually by a contracting corporation, if it is the policy of the municipality to require compensation for the use of its rights of

38

way, during the period for which it fixes the prices a corporation may charge public, private and other users for the service to be rendered by it to them.

Such compensation shall be assessed at a fixed rate per cent, to be computed on the entire corporate in­come for service sold and paid for during the year.

Sec. 8. Municipal Councils Shall Fix Prices for Service to Be Paid by Users.—The municipal council shall fix the prices a contracting corporation may charge public, private and other users for the service to be rendered by it to them, during a period of not less than five and not more than twenty-five years. The prices so fixed shall be computed on the basis of cost, and to produce sufficient annual income to fully pay all costs and to yield the corporation its authorized share of prqfit.

Sec. 9. Municipalities Shall Receive One-half of All Surplus Profit.—In case a contracting corporation earns a surplus over its authorized share of profits such surplus shall be divided equally between the mu­nicipality and the contracting corporation.