The Question of Franchises

[The author of this paper is a secretary of the Municipal Voters’ League of Chicago, which has accomplished notable reforms. — THE EDITORS.]

AMERICAN cities are rapidly beginning to realize that the question of franchises is the most important phase of the city government problem ; that the public service corporations under present conditions are the most active and potent cause of continuing municipal corruption and misgovernment. While the people were asleep, so to speak, and unmindful of the dangers threatening them, the franchise-seeking and franchise-holding corporations have been allowed in many instances to take virtual control of the machinery of local government, and to exercise that control for their own enrichment. In St. Louis the agents of these corporations have recently been shown to be guilty of bribery. In other cities the use of improper means to influence legislation is believed to be common, although the direct proof may be lacking. In Philadelphia the control of these corporate interests over the agencies of government is so absolute that public protest is utterly unavailing against any proposition put forth by those interests, no matter how unreasonable it may be, from the public point of view. In practically every community of such size as to render the control of franchise privileges of large value, the public service corporation is a source of unhealthy political activity, — a force constantly, though in some cases no doubt unconsciously, tending to weaken the government and to lessen its capacity to protect the people from imposition and to serve them efficiently and honestly. It is bad enough that these public service corporations, through their piracy of municipal franchises, should make excessive profits through the maintenance of unreasonably high charges for service that oftentimes is very unsatisfactory. But when, in addition, these corporations presume to subvert the whole mechanism of local government (and sometimes of state government, too) to their own ends, the situation becomes intolerable.

That the residents of American cities are coming more and more to recognize the situation as intolerable is shown in many ways. The most striking manifestation, perhaps, of the prevalent discontent was furnished by the remarkable result of the referendum vote on the question of municipal ownership in Chicago at the April, 1902, election. The vote was : —

Ownership of street railways — for, 142,826; against, 27,998.

Ownership of lighting plants — for, 139,999; against, 21,364.

The vote on these propositions had no legal or binding effect. It was merely an expression of public opinion. But it did indicate intense popular dissatisfaction with the present order of things. The vote shows, too, that the people at large are willing if not anxious to try the experiment of municipalization as a means of getting away from the evils attendant on private management of municipal public service industries.

And why should they not be ? Many of the cities of Europe, and especially of Great Britain, manage some or all of their public utilities, with conspicuous benefit to the people. In the United States more than half of the waterworks plants are already under public management. There are in this country 460 municipal electric light plants and fourteen municipal gas plants. The Federal Commissioner of Labor, in his fourteenth annual report, gives the results of a comprehensive investigation of water, gas, and electric light plants, both municipal and private. According to the summary of the tables in that report, the cost of production under municipal management compares very favorably with the cost of production under private management ; while wages are usually higher and the price to consumers is almost invariably lower under public than under private management. There has been only one instance of public street railway management in this country. The railway across the Brooklyn Bridge was for many years operated by the Bridge Commissioners, and under such management the road was notable for enormous traffic, efficiency of service, remarkable freedom from accidents, and good treatment of employees. Two of the most conspicuous of recent municipal improvements in this country, the New York and Boston subways, are owned though not operated by the public. The one notable instance of failure of municipal ownership of a public utility in the United States is furnished by the Philadelphia Gas Works. And in explanation of the failure in that instance it may be said that the municipal government of Philadelphia taken as a whole appears to have been a failure, very largely, it is charged, because of the power exercised by the public service corporations, especially those interested in transportation.

It does not seem likely that a further and gradual extension of municipal activity along the lines of municipalization would be followed in the main by other than wholesome results. The danger is that American cities, in their revulsion against the present evils of private management, may attempt to municipalize at too rapid a rate. Especially is there danger that the popular sentiment in favor of municipal ownership may be taken advantage of and manipulated by entrenched interests to enable them to unload their properties on the public at prices greatly in excess of their real value.

The municipal ownership spirit is in the air. Nothing can be more certain than that a continuation of the present unsatisfactory conditions under private management will bring on the early and rapid municipalization of the so-called public utilities. It is especially incumbent upon those who would check the swelling movement for municipalization, therefore, to give attention to the question of franchises with a view to remedying the conditions productive of such widespread dissatisfaction.

In the first place, cities should be given by the legislature full power to deal with the whole matter of municipal franchises as the interests of the municipality may require. This should include the grant by the legislature of the power to municipalize, in case such a course for any reason should seem wise. The question of municipalization is a question of business expediency, properly to be determined in each case according to the particular exigencies and local conditions that may exist. There is no general rule decisive of the matter in all cases. In some situations, the duty of the governing authorities might manifestly be to undertake public ownership and management, while under a different set of circumstances such a course might be as manifestly impolitic and improper. The decision, in either case, should rest with the community directly affected. Every community ought to have the grant of power from the legislature to do the one thing or the other, as might seem best. Nothing is better calculated to breed insolence in the public service corporations in their negotiations with the public authorities than the knowledge that those authorities cannot do otherwise than grant a franchise to a private agency ; that they are powerless to undertake to render the service themselves.

The value to the governing authorities of the power to bring about public management of a plant was well illustrated by the experience of the Federal government with the armor plate makers. In the absence of effective competition the price of armor plate to the government was raised until Congress, some two years ago, was about to authorize the payment of $545 a ton. The Senate, however, attached to the appropriation bill an amendment authorizing the Secretary of the Navy to erect a government armor plate plant in case he should be unable to secure plate at prices that seemed to him reasonable. In consequence of the action of Congress placing this club in the hands of the Secretary of the Navy, contracts were soon made for armor plate at prices more than $100 a ton lower than the government otherwise would have had to pay. Now there are many reasons why it should seem to be undesirable for the Federal government to go into the armor plate business. Nevertheless, the action of Congress in sanctioning a government plant, if that should be necessary to protect the government from extortion, was obviously the only wise and business-like course to pursue, considering the circumstances. So it is with the municipal public utilities. The attempt to protect the public by fostering competition in these industries, that are by their nature monopoly industries, is worse than useless. If the cities of America generally possessed the legal power to municipalize, there would not be nearly so much agitation for municipalization as there is, because the mere existence of that power in reserve would do much to put the public service corporations on their good behavior. Progressive city charter-makers all recognize this fact, and favor giving to cities the power to municipalize whether or not they expect the power to be used.

With public service industries in private hands, the important question is, How shall the public exercise effective control ? Practically every one concedes the necessity for public control of industries of this kind; yet scarcely any American community is exercising control that may properly be called effective, One of two things appears to be inevitable: either a system of really effective continuing control over public service corporations must be developed, or those industries are virtually certain to be municipalized sooner or later. The object of control should be to insure facilities and service in keeping with the changing needs of the public, and furthermore to insure that such service shall always be rendered at prices reasonable to the user. It is not enough that the service be adequate to-day and that the charges therefor be reasonable under present conditions. There must likewise be assurance that the service in the future will be adequate to the needs of the future, and that charges at all times shall be the lowest at which the service can properly be furnished, all things considered.

Now the needs of the future cannot be foreseen, at least not with any degree of accuracy. What is good street railway service to-day is likely to be inadequate service in ten years. A charge that is reasonable now may become extortionate in a comparatively short time. It is absolutely impossible, therefore, to formulate for insertion in a franchise to be granted to-day specifications that will satisfy all the requirements of tomorrow. Yet that is precisely what most communities have attempted to do. The fundamental mistake has consisted in treating franchise grants as contracts, unalterable without the consent of both parties, like ordinary contracts concerning property. Governments, like individuals, may properly enough enter into contracts relating to property, and such contracts when made should be respected; but governments ought not by contract to divest themselves of governmental functions, as they do to an extent when they surrender partial control of the public streets, by giving to private interests definiteterm contractual rights therein. It is very difficult indeed to compel a corporation enjoying definite-term rights in the streets to do what it may desire for reasons of self-interest not to do, even in cases where theoretically large powers of control are reserved to the governing authorities. The only way for a city to be certain of its ability to exercise complete control over its public streets is for it not to surrender beyond recall any rights of use or of occupancy in such streets. The city can control completely only when it is in a position to terminate at any time the right of use claimed by any person or corporation that may choose to defy the will of the city in any respect. In other words, the grant terminable at the will of the governing authorities is the only kind under which the city can be sure of its ability to dominate the situation at all times. And it is precisely in the communities where that form of grant obtains that the best results generally are secured, and it is in such communities that the relations between the corporations and the public are the most satisfactory.

This style of grant is in use in Massachusetts and in the city of Washington.

In Massachusetts it has been the policy since the first introduction of street railways not to make grants running for any definite term, but all grants are subject to revocation at any time at the will of the proper governing authorities. In Washington, where Congress is the franchise - conferring authority, all grants to public service corporations are by their terms subject to alteration, amendment, or repeal at any time. Under this system, which has been aptly termed tenure during good behavior, Washington and Boston have developed street railway systems that may fairly be said to be the best in the world. Except for a short experimental line in New York, Washington was the first city in the United States to secure the underground trolley or conduit system of propulsion, and that despite the fact that it is a comparatively small city, in which the street railway business is not nearly so profitable as in larger centres of population. And Washington secured the underground electric conduit system, not because the managers were any more willing there than in other cities to install it, but because Congress had the reserved power to require among other things the adoption of the conduit system. Whatever improvements in service the governing authorities in Washington see fit to require, are provided without the parleying and friction common in cities whose powers of control are not so clearly defined. In Massachusetts it is much the same. Boston furnishes the unparalleled spectacle of three systems — surface, elevated, and underground — so correlated that a passenger may make use of all three for a single fare.

Congress, in legislating for the new possessions acquired as a result of the Spanish war, evidently had in mind the franchise policy that has produced such good results in Washington and in Massachusetts. The Porto Rican Civil Government Act, approved April 12, 1900, was almost immediately modified by a joint resolution, approved May 1, 1900, one section of which reads as follows: —

“That all franchises, privileges, or concessions granted under section thirty-two of said act shall provide that the same shall be subject to amendment, alteration, or repeal; shall forbid the issue of stock or bonds, except in exchange for actual cash, or property at a fair valuation, equal in amount to the par value of the stock or bonds issued ; shall forbid the declaring of stock or bond dividends ; and, in the case of public service corporations, shall provide for the effective regulation of the charges thereof, and for the purchase or taking by the public authorities of their property at a fair and reasonable valuation.”

That section, though so very brief, really embodies the essential features of sound franchise policy. It provides (1) that all grants shall be subject to amendment, alteration, or repeal; (2) that there shall be no over-capitalization ; (3) that there shall be a reservation of the right to regulate charges; and (4) that the public authorities shall reserve the right to take over the property of the grantee at a fair and reasonable valuation. If American cities would incorporate similar provisions in all franchises hereafter granted, they would find that the public service corporations would be the source of far less trouble in the future than they have been in the past. ,

The Philippine Civil Government Act, approved March 2, 1901, although very brief, contains this proviso: —

“That all franchises granted under authority hereof shall contain a reservation of the right to alter, amend, or repeal the same.”

The recent grant of permission to the Commercial Cable Company to lay a cable from the mainland of the United States to the Hawaiian Islands, Guam, and the Philippines, contains these provisions, among others: —

“That the United States shall at all times have the right to purchase the cable lines, property, and effects of the said company at an appraised value, to be ascertained by disinterested persons, two to be selected by the PostmasterGeneral, two by the company or concern interested, and the fifth by the four previously selected.”

“That the consent hereby granted shall be subject to any future action by Congress, or by the President, affirming, revoking, or modifying, wholly or in part, the said conditions and terms on which this consent is given.”

So far as the writer is aware, there have been in this country but three thorough-going inquiries into the question of the proper duration of franchise grants, and in all three instances the decision was in favor of the grant without fixed duration, but terminable by the public authorities at any time. One such inquiry was made by a committee, of which Mr. Charles Francis Adams was chairman, created by act of the Massachusetts Legislature; another was made by the Chicago Street Railway Commission, and the third by the Cleveland Chamber of Commerce. Following are excerpts from the report of the Massachusetts committee, dealing with the point at issue: —

“ One feature in the franchise granted to the Massachusetts companies immediately attracts notice; from the beginning they were, and still almost invariably are, in terms perpetual, while in reality legally revocable at the discretion of local boards. In this respect they are peculiar, almost anomalous; for, as a rule, both in this country and in Europe concessions have been granted private companies for fixed periods of time only, during which the franchise, or concession, is in the nature of a binding contract. These contracts, especially in European cities, are almost infinite in their variety. They run from periods of fourteen to a hundred years, and, like leases between private parties, are framed so as to provide in advance for every contingency likely to arise. In Massachusetts, on the other hand, the grants of location have, as a rule, been of the simplest possible character, drawn in the most general terms, and with a noticeable absence of technicalities, reservations, and safeguards against contingencies; and yet, while by these locations the local boards apparently granted the corporations rights in perpetuity in the public ways, the law, at the same time, reserved to the boards the power to revoke those rights at discretion.

“In theory, such a franchise is to the last degree illogical. It can be compared only to a lease, terminable at will by the lessor, and without provision for the compensation of the lessee. Such a system, if suggested, would naturally be pronounced impracticable, if not absurd, and it would be assumed that private capital would never embark in ventures so lacking in the element of permanence and security. Yet in Massachusetts this has not proved to be the case ; nor can it be said that the system has, for the half-century it has been in use, worked otherwise than on the whole satisfactorily.

“A more fixed tenure of franchises is, however, by the terms of the act creating the committee, one of the two points it is especially instructed to consider. The substitution for the present indefinite concessions of a specific and binding contract, covering a fixed term of years, setting forth the rights and obligations of the parties thereto and containing a rule of compensation for the purchase of the property in case of failure to renew, at once suggests itself as a measure of reform ; and yet, in the course of the protracted hearings before the committee, it was very noticeable that no such change was advocated by the representatives of the municipalities or of the companies, nor, apparently, did the suggestion of such a change commend itself to either. Some amendments in detail of the existing law and partial measures of protection against possible orders of sudden, ill-considered or aggressive revocation were suggested; but it was evident that, while the municipalities wanted to retain as a weapon — a sort of discussion bludgeon — the right of revocation at will, the companies preferred, on the whole, a franchise practically permanent, though never absolutely certain, to a fixed contract tenure for a shorter term, subject to the danger of alteration at every periodic renewal. . . . The term franchise, or concessions for a fixed contract period, is, moreover, open to serious objections. As the members of the committee found wherever they studied it in operation, in this country or in Europe, it is apt to operate practically as a check on enterprise, and a bar in the way of any development involving the investment of fresh capital or of earnings which might be divided. The inducement is strong to get the largest profit possible out of the time conceded, without increasing the value of a system a renewed lease of which will at some specified time be under negotiation. . . .

“The same thing was noticeable in the American cities visited by the committee. The term franchise here, too, has been productive of dissension, poor service, scandals, and unhealthy political action. There is probably no possible system productive of only good results and in no respects open to criticism ; but, in fairness, the committee found itself forced to conclude that the Massachusetts franchise, which might perhaps not improperly be termed a tenure during good behavior, would in its practical results compare favorably with any. . . . The investigations of the committee have not led its members to believe that the public would derive benefit from the substitution of any form of term franchise now in use in place of the prescriptive Massachusetts tenure.”

The report of the Massachusetts committee bears date of 1898. The Chicago Street Railway Commission, in its report to the city council in December, 1900, under the heading “Public Control and Duration of Grants ” has this to say: —

“ In view of the fact that the indefinite term franchise has worked so well in practice, it may be in order to question the statement of the Massachusetts committee that found in favor of this form of grant that ' such a franchise is to the last degree illogical.’ Things that are illogical usually do not work well, in the long run at least. The fact that the indefinite term franchise has actually produced such satisfactory results in practice must lead one to inquire if it is not really correct in principle, despite its seeming illogical character.

“As the Massachusetts committee very clearly and very correctly points out, the street car, in evolutionary development, is ‘ nothing more nor less than an improved omnibus, and the tramway a special feature in the pavement of the public way; a feature adapted, it is true, to the car’s special use, but not necessarily excluding from general use the portion of the street in which it is laid. This is all the street railway was fifty years ago, when first laid; it is all it is now, — an improved line of omnibuses, running over a special pavement. If this fact be firmly grasped and borne constantly in mind, the discussion, and the principles underlying it, are greatly simplified. The analogy throughout is with the omnibus line, and not with the railroad train; with the public thoroughfare, and not with the private right of way. Upon this distinction, indeed, all the questions now to be discussed, whether of taxation or of franchise privilege and obligation, will be found to turn.’

“Now the omnibus is operated under a license that gives no right as against the authority granting the license that cannot be altered or taken away at any time. All would concede the unwisdom and impolicy of making the license for the omnibus a binding contract for a definite period of time that could not be altered or revoked by the granting authority, no matter how conditions might change, and no matter how arbitrary and overbearing the manager of the omnibus line might be in his dealings with the public. And yet the indefinite term grant or revocable license for the street car, which is only an improved omnibus, is conceived to be illogical. We cannot think that it is so. On the contrary, the indefinite term grant is nearer in accord with the correct principle than is the term grant.

“Because of the great outlay involved in establishing a street railway system, it is said, the owners of such property ought to have some assurance that their property value will not be destroyed by some hasty act of revocation. And so they ought. But the assurance should be that, if their rights to use the streets be revoked, their property suitable to and used for street railway purposes should be taken off their hands at a fair valuation; not that they should be privileged to remain in undisputed possession of the public streets for a definite period of time, whether they serve the public well or ill.

“The Street Railway Commission believes that the definite term grant, whatever its duration, is open to serious objections. It is of opinion that a grant of indefinite duration, but subject to termination at any time upon certain conditions, one of which should be the taking of the property of the grantee at a fair valuation, would be productive of much better results.”

The most important feature of sound municipal policy, in other words, is the retention by the public authorities of the right to terminate the grant at any time, in case the public interests render such action desirable. The grantee is afforded sufficient protection, if given assurance that his property will be taken off his hands at a fair and reasonable valuation, in case of termination of the grant. This one feature alone, if adhered to, would afford to American communities in future immunity from the worst abuses which some of them are suffering. But there are other features of franchise policy that ought to prove beneficial in practice, though none so important as the one already discussed. For one thing, excessive capitalization should not be allowed, and to accomplish this something more than a legal pronunciamento against stock watering is necessary. There must be somebody constituted to pass on all bond and stock issues as they are put forth — for example, like the state railroad and lighting commissions in Massachusetts — to insure that the spirit of the law is not contravened. For another thing, the system of accounts and public reports of corporations operating under franchise grants should be such as to enable the public to detect abuses and to understand whether the rates charged for service are reasonable. In many quarters the referendum has been advocated as a cure for franchise ills. The remedy may be somewhat clumsy, but it seems to be the only effective safeguard where grants running for definite term periods are allowed. Where the grant is — as it ought to be — subject to termination at any time, the referendum would not seem to be necessary.

George C. Sikes.