the passing of the public utility concept

8/14/2019 The Passing of the Public Utility Concept

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The Passing of the Public Utility ConceptAuthor(s): Horace M. GraySource: The Journal of Land & Public Utility Economics, Vol. 16, No. 1 (Feb., 1940), pp. 8-20Published by: University of Wisconsin PressStable URL: http://www.jstor.org/stable/3158751.

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The Passing of the PublicUtility ConceptBy HORACE M. GRAY*

T HE term publicutility concept sused herein a broadsense to denotethat body of economic,social,and legalideas which togetherconstitute the in-stitutionalframeworkwithinwhichcer-tain designated enterprises operate.Viewed analytically, it consists of cer-taineconomicand egalassumptions,er-tain social objectives sought to be at-tained, and certain administrativeandlegalproceduresdesignedto implementtheseabstractions ndtogive themfunc-tionalvitalityforpurposesof socialcon-trol.Theseassumptions,objectives,andprocedureswill be examined criticallywith aviewtowarddeterminingwhetheror not they providea satisfactorybasisforpublicregulationn themodernecon-omy. No attemptwill be madeto tracethe evolution of theseideas throughtheliterature;rather, t willbeassumed hatthepublicutility concept,in its modernAmerican orm,is a productof the latenineteenthandearlytwentiethcenturies,and that subsequentmodification hasnotchangedmateriallyts essentialchar-acteristics.Duringthe nineteenthcentury,in re-sponseto the dominantbeliefthat pub-lic interest would be best promotedbygrantsof specialprivilegeto privateper-sons and to corporations,the FederalGovernment,by gift, orsalefornominalsums, alienated in fee simple, and with-out reservation of public right, the majorportion of the public domain. This basicprivilege was supplemented by furtherfederal grants in the form of patents,subsidies, banking powers, and tariffs.

* Associate Professor of Economics and AssistantDean of the Graduate School, University of Illinois.1 Although the licenses or certificates issued underthese statutes purport to reserve to the public certain

In the twentiethcenturythisprocesshascontinuedby meansof federalgrantsofexclusiverightsto exploit particular ec-tors of thepublicdomain:hydro-electricsites (Federal Water Power Act of 1920);radio, wireless, and television channels(Federal Communications Act of I934);public highways (Motor Carrier Act ofI935); and airways (Civil AeronauticsAct of I938).' The states, following thesame theory, granted corporate chartersof extreme laxity; municipalities grantedperpetual or long-term franchises of ex-clusive character. In general, the recipi-ents of these privileges were given prac-tically a free hand in respect to organiza-tion, finance, and price policy. Theyfollowed the historic behavior pattern ofall holders of special privilege and thefinal result was monopoly, exploitation,and political corruption. These aggres-sions eventually became so apparent andso onerous that a widespreaddemand forlegislative restraint arose, in response towhich the Granger Laws, InterstateCommerce Act, Sherman Law, and thefirst state public utility statutes were en-acted. Each sought in its own way tocurb certain obvious manifestations ofmonopoly.Although these laws differed in manyrespects-differences with which thepresent discussion is not concerned-they had one feature in common. Theyall followed the delusion that privateprivilege can be reconciled with publicinterest by the alchemy of public regula-tion. Consequently, none of them dis-turbed in the slightest degree the under-lying structure of special privilege; theyrights of recovery and control, past experience affordslittle basis for confidence in the effectiveness of suchreservations.

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PASSING OF THE PUBLIC UTILITY CONCEPTmerelyreareduponit asuperstructurefrestraint. Monopoly capitalism, securein its privileges,shookoff the petty irri-tations of regulationand continueditsaggressionsagainst the public welfare.Popularopinionstill adhered o the anti-monopoly, anti-corporation traditionbut became increasinglyconfused andbewildered.Unable to detect the realsourceof difficulty,peopleweredisposedto condemnexisting political adminis-trationsfor failureto enforcethe law orto believe that additionallegislationofthesame characterwouldsolve theprob-lem. 2It was duringthis periodof con-fusion, and out of this conflictbetweenliberalideologyand the realitiesof mo-nopoly capitalism, hat thepublicutilityconceptevolved.When,shortlyaftertheturn of thecentury, t assumeddefinitivemodernform in the laws of WisconsinandNew Yorkit bore the birthmarks fthe political and ideologicalmiscegena-tion fromwhich t sprang.

TheConceptn the TwentiethCenturyThe public utility concept retainedand reaffirmed he basic fallacy of thelate nineteenth century-namely, thatprivateprivilegecan be reconciledwithpublicinterestby meansof publicregu-lation. True to the liberal tradition,itassumed a fundamentalharmony be-tween private and public interest; thisbeingthe case, specific nstancesof con-flictwereregardedas temporaryaberra-tions or maladjustmentswhich in nowisevitiated the generalrule.The visi-ble hand of public regulationwas sub-stituted for the invisible hand ofAdamSmith,and the continuousminis-tration of regulation, it was assumed,wouldsuffice to maintaina perfectbal-

2 See Thurman W. Arnold, The Folklore of Capital-ism (New Haven: Yale Univ. Press, 1937). In ChapterIX, Mr. Arnold shows how the anti-trust laws satis-fied the prevailing ideology but actually encouraged

ance betweenprivate and public inter-est. The fact that this theoryhad notworkedwith much success for the pastgeneration n other sectors of the econ-omy seemsnot to have disillusioned tsadvocatesor to havelessenedtheirfaiththat it couldbemadeto work n thespe-cialfieldof localutilities.But thepublicutility conceptwent farbeyond nineteenth century theory.Whereasformerly t had beenassumedthat competitionwas generallybenefi-cent and should, therefore, be pre-served, it was now assumed that, incertain areas at least, competitionwasundesirableand should, therefore, beeradicated by state action. This neweconomic philosophy received generallegislative sanction by the states be-tween the years 1907 and I920, and,more recently, by the federalCongressin respect to interstate operations incommunication,electric power, motortransport, air transport, and naturalgas. Thus, between 1907and 1938, thepolicy of state-created,state-protectedmonopoly became firmly establishedover a significantportion of the econ-omyandbecamnehe keystoneof modernpublic utility regulation. Henceforth,the public utility status was to be thehavenof refugefor all aspiringmonopo-listswhofound t toodifficult, oocostly,or too precariouso secureandmaintainmonopolyby privateactionalone.Theirfuture prosperitywould be assured ifonly they could induce governmenttograntthemmonopolypowerandto pro-tect them against interlopers,providedalways, of course,that governmentdidnot exact too high a pricefor its favorsin the form of restrictiveregulation.Ifpoliticalmanipulationshouldfail to re-move this last source of danger, thecombinations. The same reasoningis applicable to otherefforts at public control, including public utility regu-lation.

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Io THE JOURNALOF LAND & PUBLIC UTILITY ECONOMICSSupremeCourtcould be reliedupon torestrain any overly zealous regulatorycommission.

The obviousconflict betweenthe tra-ditionalideology and the publicutilityconceptwas resolvedbyresortto ration-alization. It was said that enterprisessupplying gas, electricity, street trans-portation, water, and telephonic com-municationwere inherently or nat-urally monopolistic; that they hadcertain natural characteristics whichdistinguished them from other enter-prisesand causedthem to followdiffer-ent lawsof economicorganization; hat,because of this natural force, theytended inevitably to becomemonop-olies; that all efforts to maintaincom-petition had failed and, by the verynatureof the case, were foredoomed ofail.Thus,the fictionof naturalmonop-oly wasinventedto explainthecentrip-etal tendencies then observable. Gov-ernment,being powerlessto resist thisnatural trend, must perforcebow tothe inevitable and accept naturalmonopolyas a principleof publicpolicy.Sucha conclusiondidnot contradict ra-ditionalthoughtfor these.newmonopo-lies weredifferent;they were naturalwhereasothermonopolieswere,by con-tradistinction, unnatural or artificial.Thus, by a soothingprocessof rationali-zation,men are able to opposemonopo-lies in general but to approve certain

types of monopolies.3But one rationalizationed to others.Since these monopolieswere natural8 For a brief discussion of the contribution of econ-omists to this rationalization see George T. Brown,The Gas Light Company of Baltimore (Baltimore: JohnsHopkins Press, 1936), c. VI. See also my review of thismonograph in 26 AmericanEconomicReview535 (Sept.,1936) in which I pointed out that Dr. Brown had failedto give proper attention to the institutional factors thatunderlie such monopolies. My conclusion on this pointwas: Franchises, way-leaves, contracts, charters, pat-ents, secret agreements, injunctions, dummy corpora-tions, cut-throat competition, newspaper and banking

and sincenature was beneficent, t fol-lowed that they were good monopo-lies. Government,being responsible orpromotingpublicwelfarewas, therefore,justified in establishing such goodmonopoliesand using its powerto pre-vent invasionby interlopers.Moreover,those who devoted their propertytothis good causewereentitled to havethe powerof the state invokedin theirbehalfto insurethema fairreturnon afair value. A natural monopoly,be-ing a good monopoly,wouldnot be-have afterthe fashionof bad monopo-lies. Subjectto an occasionalpropensityto indulgein excessivechargesand dis-criminations-aberrations that wouldbe curbedby regulation-these monop-olists would organize production effi-ciently, utilize resources o the best ad-vantage, employ the best techniquesavailable, maintain high standards ofservice,developtheirmarketscomplete-ly, secure capital at least cost, and ingeneralmanagetheir affairsto the bestinterestsof the public to whoseservicethey had devoted theirproperty.Theprofitmotive,althoughrestricted,wouldas in competitivebusiness,providetheincentivefor efficientperformance.Theroleof the state wouldbe entirelynega-tive; its interferencewould be confinedto preventingexcessivechargesand dis-criminations.

Usesand Abusesof theConceptIt is difficult, if not impossible, toidentify precisely the social objectivesinfluences, and political corruption are the institutionalingredients from which monopoly was forged by skillfuland unscrupulous manipulators. A critical evaluation ofthese elements might have shed considerable doubtupon the 'naturalness' of this and similar monopolies.For a similar view, with respect to the so-called in-evitabilityof industrial monopoly, see the statement byLeon Henderson in Investigation of Concentration ofEconomic Power, Hearings before Temporary Na-tional Economic Committee, Pt. 5, pp. 1974-5 (Wash-ington: Government Printing Office, I939).



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PASSING OF THE PUBLIC UTILITY CONCEPTof the publicutility concept duringthisperiodof confused rationalization.Cer-tainly many of the proponentsof publicutility regulation ntendedit to protectconsumersagainstexcessivechargesanddiscriminations; ll the early state lawsbearwitness to this intent. It shouldberemembered,however,that behindthislaudablesocial purposelurked the sin-ister forces of private privilege andmonopoly.They desired mmunityfromprosecutionunder the anti-trust laws,legal validation of their privileges asproperty rights, the protection of thestate for their monopolies,and a rela-tivelyfreehandto extend their economicpower.All theseobjectivesthey attainedunderthe publicutility status.4In addi-tion, they secured gratis somethingequally important-public acceptanceandlegalrecognitionof the economic ic-tionof natural monopoly.Whateverrelative weight may be as-signed to these conflictingobjectivesinpre-warlegislation, it seems clear thatprotectionof consumers aded into thebackgroundduringsubsequentyears.Inthe war periodemphasisshifted to theproblemsof providingadequateservicefacilities, obtainingmuch needed capi-tal, andadjustingratesupwardto coverrisingcosts.After the warthe utility in-dustries entered upon a boom periodduring which rapid expansionwas theguiding principle of both private andpublicpolicy.Private financiers ndpro-moters were concernedwith new con-struction, finance, consolidation,elimi-nationof residualcompetition,organiza-tion of great economic empires, andspeculativeprofits.Publicregulation, nso far as the interestsof consumerswere

4 Burton N. Behling, Competition and Monopoly inPublic Utility Industries (Urbana. Univ. of Ill. Press,1938). In Chapter IV, Dr. Behling shows how thepolicies of commissions and courts tended to strengthenand protect monopoly without at the same time curbingits aggressions.

concerned, ractically eased ofunction;the policies of commissionsand courts,particularlythe latter, were calculatedto promotethe expansionistand profit-seeking activities of private enterprise.When, after 1929, the drastic curtail-ment of consumer purchasing powergave rise to a widespread agitationfor reductionof utility rates, commis-sions and courts came to the rescueofthe hardpressedutilitiesandprevented,orminimized, atereductionby invokinga torturedconstructionof the fairre-turnon fairvalue doctrine.In extremecases,as in railroads, ateswereactuallyraisedat a time whenby everycriterionof economicteaching they shouldhavebeen lowered. It thus became increas-ingly apparentthat protectionof con-sumers had been superseded n largemeasure by protectionof property.Recently an even more menacingandanti-socialuse of the public utility con-cept has developed.In orderto preserveobsoleteeconomicorganization,t is nowproposedto invoke this conceptto pre-vent the establishmentof alternative n-stitutions designed to serve needs notadequatelyprovidedfor under existingarrangements.A number of examplesmay be cited to illustrate this lateststageof institutionaldecadence.The railroads have long sought tocurbthedevelopmentofmotortransportby securingits inclusionwithin the re-strictive confines of the public utilitystatus. They have sponsored,and ob-tained, federal and state legislationde-signedto restrictcompetitionby forcingmotorcarriers,as a conditionprecedentto operation,to apply for certificatesofconvenience and necessity;5 the rail-

6 Regulation of Motor Carriers of Persons, HouseReportNo. 783, 7Ist Cong., 2nd Sess., I930. In a minor-ity report, Congressman George Huddleston describedthe purpose of the proposed legislation as follows: It[the bill] was proposed and urged by the bus operators(Footnote5 continued on page 12)

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I2 THE JOURNAL OF LAND & PUBLIC UTILITY ECONOMICSroads,of course,haveopposed hegrant-ing of such certificates.In Illinois, forexample, the Commerce Commission,operatingundera publicutility statute,is reported o have granted2I exclusivecertificates on main highways.6Thisstate-creationof private monopoliesonthe public highwaysarousedsuch pro-test that the legislature,after an inves-tigation, transferredjurisdiction overmotor trucksto the Departmentof Pub-lic Works and Buildings,and displacedthe publicutility type of regulationbypoliceregulationdesigned o insurepub-lic safety.7Recently, the AssociationofAmericanRailroadshas disseminatedareport in which it is proposedthat allhighways and waterways be declaredpublic utilities and that privilegetaxes

(Footnote5 continuedfrom page Ir)and the rail carriers, and their affiliated interests. Themain purpose of its proponents is to secure themselvesagainst competition. This is to be accomplished throughthe device of the 'certificate of convenience and neces-sity.' The proponents of the bill admitted candidly thatits main purpose was to give a monopoly, to eliminatecompetition. The main purpose of this bill is to create amonopoly in a situation which would otherwise behighly competitive, and then to make of the monopolyan excuse for regulation. This legislation is merely a partof the general effort of an important school of businessmen to get away from the competitive system. (Sum-marized from pp. 16-9.)Later, Joseph B. Eastman, as Federal CoordinatorofTransportation, stated: The demand for regulation ofthe motor-transportindustry began with the railroads ;and The railroadshave spent too much time and atten-tion on plans for the restriction of their competitors andtoo little on the development and improvement of theirown service and the readjustment of their own rates.( Regulation of Transportation Agencies, Sen. Doc.No. 152, 73rd Cong., 2nd Sess., 1934, pp. 33 and 35.)Moreover, there can be no doubt that the railroadsplayed an important role in securing the passage of theFederal Motor CarrierAct of I935.6 Statement of Senator Louis J. Menges, as reportedin the ChicagoTribune,Dec. 14, I938.7 Illinois Truck Act, Ill. Rev. Stats. I939, p. 2162.8 Highway Costs, Assn. of Amer. Railroads, Jan.30, 1939; see especially c's I and II. The TransportationAssociation of America, in A National TransportationProgram, Vols. I and II and Supp. No. I (Chicago,1938), urges that all formsof transport be brought underuniform regulation administered by the Interstate Com-merce Commission. The National Highway Users Con-

or fees, sufficientto defrayall costs, belevied upon those who use them.8Thiscontention seems to have somejudicialsupport,as exemplifiedn the Brashearcase, where a lower federal court, in up-holding certain taxes levied on motorcarriers, said:The highwaysystem owned by the stateand its subdivisions s a publicutility sup-plying facilities which constitute an actualmonopolywhich is subject to inter-govern-ment regulationand control. The annualcost of operating such utility should bedeterminedin the same manner as for aprivatelyownedutility. 9

In the field of electric power, privatecompanies, on numerous occasions, haveinvoked the public utility concept toprevent or to hinder the development ofpublic organizations for producing andference,however, in Highway TransportationRe-Makes America (Washington,1939) maintainsthatthehighways houldbe free.It states at p. 5: Freedomof thehighwayss againbeingthreatenedn theUnitedStates-not by tollgateserectedby men n theattemptto convertthe publichighway nto a privatebusiness,but by drasticrestrictions ndpunitivetaxationwhoseeffectis to curb the movementof personsand goodsover the highways.Impositionof heavy burdensuponhighwayusersis inspiredby interestswhich hope toprofit from the resultingcurtailmentof the use ofhighways. Andagain,at p. Io: to the averagepersonfreeaccess to the highwaysseems to lie in the samecategoryas free access to the air and sunlight. Onp. 20 an excerptfrom the DillmanReport s quoted othe effectthat highways re notpublicutilities.Where-upon the Association f AmericanRailroads, peakingthroughits economist,Dr. C. S. Duncan, issued acounterblast ntitled TheAnswer o HighwayPropa-ganda (Washington, 939) n which,afterattemptingto exposeand discreditthe National HighwayUsersConference,Dr. Duncancloseswiththe direforebodingthat unlesshighwaysare considered s publicutilitiesand every userof the improvedhighways s chargedfairlyfor his use of these facilities,we are headeddi-rectlyfora socializedndustry p. 20).9Brashear reightLines,Inc. v. Hughes,n the Dist.Ct. of the U.S. for the So. Dist. of Ill., So. Div., InEquity DC 2273 (1938). See also Edward D. Allen,HighwayCosts and TheirAllocation, 5 JournalofLand & Public Utility Economics 269-76 (August,1939) and 404-I5 (November, 1939). Professor Allenfavors the publicutility approachand, afteroutliningthe theoretical justification for this view, attempts toderive a practical formula for allocating costs to high-way users.



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PASSINGOF THE PUBLICUTILITYCONCEPTdistributing electricity.'0 They haveagitatedunceasinglyto secure inclusionwithin the public utility category ofmunicipal electric systems so that thelatter, despite their institutional dis-similarity,can be forced to conformtothe samerulesandregulations hat gov-ern private operations. They havesought to block municipalcompetitionby the plea that their franchises andcertificates are exclusive.l2They haveeven maintained that the TennesseeValleyAuthority,an agencyof the Fed-

10Aninvestigationby theFederalPowerCommissionreveals hatprivatecompanies,romI88I to 1935,filed278 petitionsforinjunctionsagainstI95 publicauthor-ities to restrain hemfromconstructing lectricplants.Of thesepetitionsonly90 werefiledduring he 50yearsfrom 188I-I930; the remainder, or I88, were filed be-tween I931 and 1935. ( Restraining Ordersand Injunc-tions Instituted against Public Electric Projects,Sen. Doc. No. I82, 74th Cong., 2nd Sess, 1936.)11In 1935, I2 state utility commissions claimed gen-eral,and nine otherspartial, urisdiction ver the ratesof municipalelectricutilities (FederalPowerCommis-sion, Rate Series No. 6, I935, pp. 2-4). For a recentjudicialdecision, n whicha statesupreme ourtexplic-itly repudiatedhis contentionand held that municipalelectric ystemsare not publicutilities,seeBirminghamElec. Co. v. City of Bessemer,- Ala. -, i86 So. 569,28 P.U.R. (N.S.) ISi (I939).12 Ala. Power Co. v. Ickes, 302 U.S. 464, 82 L. ed.-, 58 S. Ct. 300, 2I P.U.R. (N.S.) 289 (1938); DukePowerCo.v.Greenwoodounty, 02 U.S. 485, 82 L. ed.-, 58 S. Ct. 306, 21 P.U.R. (N.S.) 298 (I938).In these two casesa formerdecisionof the SupremeCourtroseto plague t. In 1929, n Frostv. Okla.Corp.Corn.,278 U.S. 5I5, 49 S. Ct. 235, P.U.R. 1929 B 634,the Court had held that a license to operatea cottongin, grantedundera state public utility statute, was apropertyrightwithinthe protectionof the FourteenthAmendment nd wasexclusiveas againsta farmers' o-operative ginning company. Mr. Justice Brandeis(HolmesandStoneconcurring) issentedon thegroundthat a farmers' ooperativewasentirelydifferent romacommercial stablishmentand, hence, the discrimina-tory classification f the Oklahoma tatute in questionwas ustifiable.Mr.JusticeStone(HolmesandBrandeisconcurring)wroteaseparatedissenting pinionn whichhe developedthe doctrineof damnumabsque njuria.When, n 1938, he Alabama ndDukecompanies eliedon the Frostcase tosubstantiate heirclaim hatmunic-ipal competitionthreatened o destroytheirpropertyand, hence,contravened he FourteenthAmendment,Mr. Justice Sutherland, speaking for a unanimousCourt, held that the Frost doctrinewas inapplicableand that, since the competition complainedof was

eral Governmentdesignedto serve eco-nomic and social needs entirelyoutsidethe public utility concept, should beamenableto the public utility laws ofTennessee and Alabama.13They haveharassed he Authoritywith continuouspropaganda, litigation, and investiga-tion, much of which has been basedon the charge that its policies withrespect to costs, rates, finance, taxes,promotionalexpenses, and accountingdiffer from those followed by privatecompanies.14 hey have attempted tolegal,theruleof damnum bsquenjuriaapplied.Again,in 1939, in Tenn. Elec. Power Co. v. TVA, - U.S.-, 83 L. ed. -, 59 S. Ct. 366, 27 P.U.R. (N.S.) I,the private companyrelied in part on the Frost doc-trine. But, once again, Mr. Justice Robertsspeakingforthemajority, heCourtheldthat theFrostcase wasinapplicableand reaffirmed he doctrineof damnumabsque njuria.Mr. Justice Butler, however,speakingforhimselfand Mr. JusticeMcReynolds,dissentedontheground hat the Frost case wasapplicable, ndthatthe competitioncomplained f was illegaland, hence,unconstitutional. t would seem, therefore,that theFrost doctrine, althoughnever expresslyrepudiated,has been abandoned, or the time being at least, infavor of the rule of damnumabsque njuria. For acriticismof this latterdoctrine,andanexposition f theprivate utility pointof view, see WilliamM. Wherry,Federal Competition May Be Unconstitutional-but? 24 Public Utilities Fortnightly3-12 (July 6, I939)and 24 Ibid. 84-91 (July 20, I939).18Tenn. Elec. Power Co. v. TVA, supra n. 12.14Thesechargesculminatedn an investigationby aJoint Congressional ommittee,pursuant o Pub. Res.83, 75th Cong.The majorityreportrecognizes learlythe inherentdifferences etweenTVA andprivateutil-ities. The threeminoritymembers,however,refuse toconcedesuch distinctionsand insist that TVA shouldbe subjectto regulationn the same manneras privatecompanies. n theirownwords: It shouldbe under heregulationof local State utility commissionsand theFederalPowerCommissionn substantially he samemanner as private utilities are under such regula-tion.... The TVA should be required to fix reasonablerates that wouldcoverallcosts,including perating x-penses, ntereston theinvestment, axes,anddeprecia-tion or amortization. t shouldpay all Federal,State,and local taxes in the same way as taxes on similarprivateproperty s [as printed]computed.We recom-mend that the TVA define its area of distribution othat presentuncertaintymay be removedand the pri-vate utilities n adjoiningareas feeljustified n makingmuch-needed nvestments for improvementsand ex-pansions. (Report,p. 277.)(Footnote4 continued npage14)

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14 THE JOURNAL OF LAND & PUBLIC UTILITY ECONOMICSblock the organizationof rural electriccooperativesby contendingbefore com-missions and courts that the lattershould be classified as public utilitiesand forcedto obtaincertificatesof con-venience and necessity-which granttheprivatecompaniesare,of course,pre-paredto oppose.Althoughthis attempt-ed perversionof the public utility con-cept ultimately failed in most jurisdic-tions,it hasresulted n protracteddelaysand considerableexpense to the ruralcooperatives.15Though generally de-feated in this majorattack, the privatepowercompaniesare still able,underex-isting laws, to continue their programofharassment by securing from some com-missions permits for extensions that cutthrough territory blocked out for uni-tary development by cooperatives.l1The same tendency to invoke the pub-lic utility concept in order to forestallthe development of new institutions that

(Footnote14 continuedfrom page 13)On April 5, 1939, Rep. Rankin of Mississippi chargedin the House that the minority report had been ghostwritten by private utility propagandists. Rep. Jenkinsof Ohio, a minority member of the Committee, deniedthis. (See CongressionalRecord.) Drew and Pearson, intheir syndicated column, Washington Merry-Go-Round, of April 5, 1939, made the same charge.16Re West Tenn. Power & Light Co., I8 P.U.R. (N.S.)369 (I937); Ala. Power Co. v. Cullman County Elec.MembershipCorp., I9 P.U.R. (N.S.) 464, 234 Ala. 396,174 So. 866 (I937); Carolina Power & Light Co. v.7ohnston County Elec. Membership Corp., 20 P.U.R.(N.S.) 208, 211 N.C. 717, 192 S.E. 105 (I937); South-western States Tel. Co. v. Okla.Inter-CountyElec. Coop.,

27 P.U.R. (N.S.) 321 (1938).The West Virginia Commission is one of the few thathave insisted that rural electric cooperatives are publicutilities and must show cause in orderto obtain a certif-icate of public convenience and necessity (Re HarrisonRural Electrification Assn., Inc., 24 P.U.R. (N.S.) 7(1938)).16 For a vigorous discussion of the obstructionistictactics of private power companies against rural co-operatives see Annual Report,Rural Electrification Ad-min., 1938, pp. 5-6, 76-83, and 94-105. For a specialform of obstruction-namely, refusal to grant satisfac-tory wholesale rates to ruralcooperatives-see W. Clar-ence Adams, Electric Cooperatives Scan WholesalePower Rates, 22 Public Utilities Fortnightly 368-77(Sept. 15, 1938).

threatenthe securityof existingorgani-zationsmay be observed n otherfields.The radioindustry,desirousof monopo-lizing the air but fearful that its tem-porarylicensesmay be revokedor thatpublicbroadcastingmay be established,may ultimatelyseekrefuge n the publicutility concept.'7The real estate inter-ests of Chicago, n an effortto frustratepublic housing, recently conducted anactive but unsuccessful ampaign orthecreationof publicservicehousingcor-porations. '8 The milk monopolists, un-able to suppresscompetitioncompletely,unableto appeasethe exploitedfarmersand consumers,hreatenednsome areaswith municipaland cooperativedistri-butionandunderindictmentor investi-gation for restraintof trade, may soonfind t expedientto seekadmission o thepublicutility status,provided,of course,that the conditions mposedby govern-ment are not too onerous.19

17Frank Waldrop and Joseph Borkin, Television-AStrugglefor Power (New York: William Morrow & Co.,1938), c. 22.18Illinois Sen. Bill 264, introduced March 29, I939;see Chicago Tribune, March 30, I939. These corpora-tions were to be given a broadpower of eminent domain,a relatively free hand in building construction and oper-ation, and their rentals were to be fixed in accordancewith the public utility formula. It was charged by theopposition, and never successfully refuted, that the realpurpose was to block out large slum areas in Chicagoso that land could not be secured for public housing.Compare with the strict provisions of the existing Illi-nois statute governing private housing corporations,ap-proved July 12, I933 (Ill. Rev. Stats. 1939, p. 922). Forpropaganda in favor of these public service housingcorporations, see Chicago Tribune, beginning Dec. 14,I938 and continuing through June, 1939.

19 In 1935 I considered this question on its merits andreached the conclusion that the distribution of milkshould not be a public utility. (Horace M. Gray,Should the Distribution of Milk be a Public Utility?Dairy ManufacturersConferenceManual (Urbana, Univ.of Ill., Jan. 21-25, I935).) This judgment is not in agree-ment with the more favorable view expressed a yearlater by Professor W. P. Mortenson in Distribution ofMilk under Public Utility Regulation, 27 AmericanEconomic Review 22-40 (March, I936). At pp. 39-40,Professor Mortenson says that distribution of milk asa public utility can succeed if all the interested parties(Footnote9r continuedon page 5)



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PASSING OF THE PUBLIC UTILITY CONCEPTThe air transport companies havebeen broughtwithin the public utilitycategoryto the extent that they arenow

being given exclusivecertificatesof con-venience and necessity.20The radiobroadcasting nterests, having built upnation-wide ystemsundera six months'licensing arrangement,are dissatisfiedwith their insecurityof tenure and aredemanding ndeterminatecertificatesofexclusive character.21 The chronicallychaotic bituminous coal industry hassought and obtaineda measureof gov-ernmentalprotectionunder the GuffeyAct; althoughthis form of controldoesnot coincidewith public utility regula-tion, it goes far in the same direction.Likewise, the restrictionand prorationschemesnowin voguein theoil industryresemble public utility regulation insomerespects, althoughthey do not in-volve fixationof profitmarginsorpricesby government.Fromthe samepointofview, the whole NRA experimentmaybe regardedas an effortby big businessto secure legal sanction for its monop-olistic practicesand to invoke the pow-er of the FederalGovernmentto assistin suppressing competition. Even cer-tain farm groups, findingthemselves ndesperateeconomicstraits and observ-ing how the mantle of governmental

(FootnoteI9 continuedfrom page 14)cooperate to make it succeed. This last condition, how-ever, begs the question, for experience shows that thisis the very thing they will not do. After a reexaminationof this question in the light of recent experience withpublic utility control, I am more than ever convincedthat it would be a mistake to apply the public utilityconcept to the distribution of milk.20 Oswald Ryan, The Civil Aeronautics Act of 1938,23 Public Utilities Fortnightly 5i5-25 (April 27, 1939).21 ChicagoTribune,April 30, 1939.22A federal bill of this character, the so-called costof production plan, is reported to have been approvedby the Senate Committee on Agriculture (ChicagoTribune,March 31, 1939).u Professor Henry C. Simons in The Requisites ofFree Competition, 26 American Economic Review68-76 (March, 1936) at p. 74 holds that: Unregulated,

protectionhas beenthrownaroundpub-lic utility monopolists, proclaim thatagriculture houldbea publicutility andshouldreceivethe sameprotection.22Enoughperhapshasbeensaidto dem-onstrate the institutionaldecadenceof the public utility concept. It origi-nated as a system of socialrestraintde-signedprimarily,or at least ostensibly,to protect consumersfrom the aggres-sions of monopolists; t has ended as adevice to protect the property,i.e., thecapitalizedexpectancy,of thesemonop-olists from the just demandsof society,and to obstructthe developmentof so-cially superior nstitutions.This perver-sion of the public utility concept fromits originalpurposewasperhaps nevita-ble undercapitalism.Here, as in otherareasof oureconomicandsociallife, thecompelling anctionsof privatepropertyand private profit, working within aframeworkof special privilege, deter-minedthe directionandoutlookof pub-lic policy.Just as in the daysof the Em-pire all roadsled to Rome so in a capi-talisticsocietyall formsof social controlleadutlimatelyto stateprotectionof thedominant interest, i.e., property. Thepublic utility concept has thus merelygone the way of all flesh.23extra-legal monopolies are tolerable evils; but privatemonopolies with the blessing of regulation and the sup-port of law are malignant cancers in the system. Hegoes on to affirmthat such regulation leads inevitably tofascism; he advocates the stamping out of privatemonopoly and the public ownership of railroads andutilities. A similar view is expressed by Professor Clif-ford T. James in Commons on Institutional Eco-nomics, 27 American EconomicReview61-75 (I937).The Federal Trade Commission has recently deemedit necessary to warn against the application of this doc-trine to the steel business: The classification of in-dustries as necessary [natural] monopolies should be,in the Commission's opinion, kept to as narrow limits astechnical considerations permit.... The Commissiontherefore suggests that the steel industry, which it be-lieves to be capable of reasonably efficient operationwithout monopoly, should be definitely separated inpublic policy from the 'natural' monopolies, and treated

(Footnote23 continued on page z6)

IS



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16 THE JOURNALOF LAND & PUBLIC UTILITY ECONOMICSObsolescenceof the ConceptBut aside from its perversion to anti-social ends, the public utility concept isobsolete from another point of view. Aspreviously noted, it was designed to at-tain limited objectives by negativemeans. One may read the early publicutility statutes in vain to discover anyexpress mandate for the positive promo-tion of public welfare; the whole tenorof these laws is negative and restrictive;they prohibit certain obvious forms ofmonopolistic misbehavior but fail to im-

pose definite responsibility for sociallydesirable action. Thus, public utilitycompanies areunder no legal compulsionto conserve natural resources, to utilizecapital efficiently, to employ the bestknown techniques and forms of organi-zation, to treat labor fairly, to extendservice to non-profitable areas, to im-prove public health, to strengthen na-tional defense, to promote technical re-search, to provide service to indigentpersons, to institute rate and servicepolicies that will foster cultural and so-cial values, or to develop related bene-fits such as navigation, floodcontrol, andirrigation. This being the case, privateutility monopolosits will have regard forthese broad social objectives only whenby so doing they can increase or main-tain their own profit. Experience hasshown that they will not voluntarilystrive to attain these ends; moreover, itis clear that public utility regulation, asat present constituted, cannot compelthem, against their own interest, to doso. Thus, the public utility concept is

(Footnote23 continuedfrompage 15)as a free enterprise. ( Investigation of Concentrationof Economic Power, op. cit., Pt. 5, p. 2199.)An English critic describes the fictional character ofthe public utility concept as follows: In these cases(natural monopolies) it seemed best to countenance un-righteousness but to limit the plunder. A pompous andquestion-begging name-'business affected with a pub-lic interest'-was therefore invented by the lawyers to

functionally mpotent in the sense thatit is incapableof securingthe socialob-jectives that are essential in the mod-ern economy. When any institutionreachesthis advancedstate of obsoles-cence,it tendsto be supersededby somenew institution that is morepositive incharacter ndbetteradapted o theneedsof the time;sucha processof gradual u-persessionseems now to be underway.Withinrecentyearsthe institutionalinventiveness of political leaders andpublic administratorshas produced anumber of such new institutional ar-rangements.Amongtheseare:directac-tion by departmentsor bureausof theFederal Governmentto supply neededfacilities;public corporationscharteredunderboth federal and state authority;multiple-purpose, regional, water-con-trolprojects;ruralelectriccooperatives;federal grants-in-aid;federal-state-mu-nicipalcooperation;Public Works oans-and-grants;Reconstruction inanceCor-porationloans; and federalsubsidy fordesirableservices. None of these comeswithin the traditionalpublicutility con-cept; they all involvedirect,positiveac-tion rather hanmerenegativerestraint;they are relatively immune from re-strictive, judicial interpretationof thepropertyand due processclausesof theFifth and FourteenthAmendments; n-steadof relyingexclusivelyon the policepowerof the states and the commercepowerof the FederalConstitution,bothhithertonarrowlycircumscribedby theSupremeCourt,theycall intoplayothermorepositiveandless restrictedpowerscover such enterprises, and they were placed under spe-cial government regulation.But the classification soon became a veritable Pan-dora's box.. . the qualifications necessary for admis-sion to the box have changed so constantly that itspresent contents form a very ill-assorted miscellany,... and the nature of additions thereto is quite unpre-dictable. (A. S. J. Baster, The Twilight of AmericanCapitalism (Westminster: P. S. King & Son, Ltd.,1937), P. 27.)



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PASSING OF THE PUBLIC UTILITY CONCEPTof the FederalGovernment, uch as theproprietary, inance,publicwelfare,andnational defense powers. In every re-spect, therefore,these new institutionaldevices appearmorecapableof servingmodern social needs than do privatemonopoliesoperatingunderpublicutil-ity regulation.24Anotherrelatedmovement hat pointsin the samegeneraldirection is the riseof creativeeconomicplanningby govern-ment. Under the prevailingsystem ofmonopoly capitalism,privateenterpriseseems to have lost, in largemeasure, tspower to plan constructively for pro-gressive improvementof the economy.This failureis observable n many areasand,in the utility field, s mostapparentin connectionwith waterresources, lec-tric power,naturalgas, communication,and transportation.Now this is a fatalweakness, for when private enterprisefalters in the performanceof this all-important creative function, govern-ment must assume this responsibility,ideologiesto the contrarynotwithstand-ing. No one who has studied this phaseof the problemcarefullycan fail to beaware of the serious shortcomingsofprivateenterprisen theseareas,orof thesignificantprogressmade within recentyears by governmental planning. Noone today believes seriously that thescientificcontrolandutilizationof waterresources, he perfectionof sociallyade-quatenationalsystemsof electricpowerand electric communications,the con-servationof naturalgas, and the ration-alization of our chaotic transportationsystem can be accomplishedby privateenterpriseoperatingwithin the frame-work of the traditional public utility

24 Horace M. Gray, Recent Changes in the PublicControl of Electric Rates, 17 Journal of Business(University of Iowa) 7-IO (March, I937). In this articleI analyzed briefly the contributions of certain new in-stitutions to public control of electric rates and came tothe conclusion that they are far more effective in this

concept. It is generally recognized hatthe solution of these problemswill re-quire governmentalaction of a quitedifferent order than that involved inpublic utility regulation. This actionmust be positive and creative, it mustcall into play powersof governmentnotheretoforebroughtto bear,it must restupona solid basisof economicandsocialplanning,and it must be free from thecreeping paralysis of judicial interfer-ence.Even the SupremeCourt, the legalprogenitorof the public utility concept,appears o entertain omedoubtcon-cerning its own handiwork. In a longseries of cases, from WolffPackingCo.v. Kansas Industrial CommissioninI92225to New State Ice Co. v. Liebmannin I932,26 the Court used the publicutility concept as a closed legal categorywith which to invalidate efforts of thestates to regulate certain types of busi-ness. This narrow, legalistic interpreta-tion evoked a rising tide of criticism,both within and outside the Court,which reached a peak in the classic dis-senting opinion of Mr. Justice Brandeisin the Ice case. Finally, in Nebbia v. NewYork (I934),27 Mr. Justice Roberts, forthe majority practically abandoned thetraditional position. Admitting explicitlythat the milk business was not, andnever had been, considered a public util-ity, he held, nevertheless, that the stateof New York, if the legislature saw fit todo so, could fix the price of milk withoutcontravening the Fourteenth Amend-ment. In short, the question whether ornot the milk business was a public util-ity, or of such nature that it could prop-erly be so classified, was irrelevant to therespect than traditionalmethods under the publicutility doctrine.26 262 U.S.,522.26285 U.S. 262.27 291 U.S. 502, 78 L. ed. -, 54 S. Ct. 505, 2 P.U.R.(N.S.) 337.

17



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18 THE JOURNALOF LAND & PUBLIC UTILITY ECONOMICSmain issue. The power to regulatewasinherent n the state and could be exer-cised, both with respect to prices andothermatters,if the legislature elt thatconditionswarranted.A minorityof theCourt,however,could not stomachsuchlegal heresy. Mr. Justice McReynolds(Van Devanter, Sutherlandand Butlerconcurring)wrote a dissenting opinionin whichhe restatedand reaffirmedhetraditionaldoctrinethat pricescould beregulatedonlywhen t wasclearlyshownthat the business n questionwas a pub-lic utility or of suchnaturethat it couldbesoregarded.The abandonment f thisprinciple would, he asserted, open thedoor to almost unlimited public regula-tion of prices. This prophecy was ofcourse correct but, as Mr. JusticeRoberts pointed out, quite irrelevant.Certain other established features ofthe public utility concept have likewisebeen attacked by individual members ofthe Court. In McCart v. IndianapolisWater Company (I938),28 Mr. JusticeBlack, in a caustic dissenting opinion,condemned the theory of reproductionvalue as productive of interminable de-lays and hopeless confusion. After com-menting upon the necessity for judicialprophecy to decide valuation cases, heasked: Can a judge be found who canaccurately devine all future prices ofcommodities to be used for imaginaryreproductions of this company's prop-erty? (P.U.R., p. 47I.) He then goes onto describe the chaotic procedure ofvaluation:

it is exceedingly difficult to discern thetruth through he mazeof formulasand thejungle of metaphysicalconceptssometimesconceived, and often fostered, by the in-genuityof thosewhoseekinflatedvaluationsto support excessive rates.... Completelylost in the confusionof language-too fre-quentlyinvented for the purposeof confus-28302 U.S. 419, 82 L. ed. 336, 58 S. Ct. 324,21 P.U.R.(N.S.) 465.

ing-Commissions and courts passinguponrates for publicutilities are driven to listento conjectures,speculations,estimates,andguesses,all underthe name of 'reproductioncosts'. (P.U.R., p. 472.)To illustrate the preposterous claimsmade in the name of reproductionvalue, Mr. Justice Black describes, ina delightfully ironic passage, the trialsand tribulations of imaginary sailors at-tempting to navigate the White Riverand the devoted efforts of the com-pany to facilitate their nautical venture,thereby creating a value upon whichthe users of water in Indianapolis areexpected to pay a fair return.Mr. Justice Frankfurter (Black con-curring), in a recent dissenting opinion,29not only declares the Smyth v. Amesformula for valuation moribund butshows how the states by various deviceshave sought to escape it. He is preparedto approve the constitutionality of thenew device involved in this particularcase-namely, the temporary rate reduc-tion order with future recoupment ifnecessary. In his own words:

the court's opinion appearsto give newvitality needlessly to the mischievousfor-mula for fixing utility rates in Smyth v.Ames. The force of reason, confirmedbyevents, has graduallybeen renderingthatformula moribund by revealing it to beuseless as a guide for adjudication.... Atleast one importantstate has for decadesgone on its way unmindfulof Smyth v.Ames, and other states have by variousproposals oughtto escapethe fogintowhichspeculationsbasedon Smyth v. Ames haveenvelopedthe practicaltask of administer-ing systems of utility regulation ... Thestatute under which the presentcase aroserepresents an effort to escape Smyth v.Ames at least as to temporaryrates. It isthe result of a conscientiousand informedendeavor o meet difficulties ngenderedbylegal doctrines which have been widely

29 Driscoll v. Edison Light & Power Co., - U.S.-, 83 L. ed. -, 59 S. Ct. 715, 28 P.U.R. (N.S.) 65(i939).



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PASSING OF THE PUBL]rejected by the great weight of economicopinion,by authoritative egislativeinvesti-gations,by utility Commissionshroughoutthe country, and by impressive judicialdissents. (P.U.R., pp. 76-7.)The valuation doctrine has enjoyed a re-markable vitality but it is difficult to seehow it can long withstand such criticismfrom within the Court itself. In themeantime the states, as Mr. JusticeFrankfurter points out, are exercisingtheir ingenuity to find practicable ave-nues of escape.

ConclusionThe conclusion is inescapable that thepublic utility concept, as we have knownit, lacks survival value in the moderneconomy;30 ts limited objectives, its in-herent contradictions, its negative char-acter, and its perversion to anti-socialpurposes render it impotent for the solu-tion of present-day problems. Like otheroutmoded institutions, it seems destinedto decline inrelative significanceandulti-

mately to be superseded by new andsocially superior institutions. But thepassing of the public utility concept isnot likely to proceed rapidly. It is deeply30CommissionereromeFrank,of the Securities ndExchangeCommission, eaches he sameconclusionnInvestigation f Concentration f EconomicPower,op.cit.,Pt. 5.He suggestsat p. 1954 that thetraditionalkind of publicutilityregulation ught to be severelymodified,f not abandoned, nd that certainly t oughtnot to be applied to other industries. He says (pp.1955-6): It doesn'tseemto me that in facingnew and

seriousproblemswe need to rely solely upon mecha-nisms andcontrivances eretoforenvented,regardlessof theirprovedpartial nadequacy ... I don't thinkwe areobliged o fallbackuponthe analysesmadeyes-terday that the only conceivableway of actingis byGovernmentencroachmentupon the activitiesof in-dustryin the particularormwe have used heretofore... We oughtn't,so to speak, to operateon the bodypoliticwith rustyor antiquated surgicalinstruments.... I think t wouldhelpourthinkingon thesubjectofthepossibleextensionof thecategoryof such ndustriesif we coulddrop the use of the words'publicutility,'for,unfortunately,hat phrasehas nowassociatedwithit a certainkindof so-called regulation.' t mighthelpour thinkingif we could invent some new word-Idon't knowwhat thewordwouldbe;for ack of a better

IC UTILITYCONCEPT 19rootedin our law and social traditions;powerfuleconomicorganizationshave avested interest in its preservationas aprotectivedevice; and, as a people,ourcapacity for institutional inventive-ness is poorly developed.Hence, therate of change will probablybe deter-mined by our ability to originate andperfectnew institutions that are betteradaptedto modernneeds.The fact, however, that the publicutility concept is tending to be super-sededshouldserve as a warning o thosewho proposeto extend its application.Why shouldan obsoleteinstitution,onethat is a demonstratedfailure, be ex-tended to embraceadditional economicactivities?What reasonis there to sup-pose that a system of public controlwhichhas provedineffective n the caseof transportation,power,andcommuni-cationswill prove successful n the caseof oil, coal, milk, housing, and otherforms of enterprise?Why, at the verytime when it is beingsupersededn thoseareas whereit has been operative formany years, should it be extended tonew fields where the problemsarequiteone we might call it 'ugwug'--somethinghat has noemotionalconnotations,no past historyattachedto itand thereforedoesn't call to mindall the apparatus fourpresentand,I think, argely nadequatemethodofdealingwith those industrieswhich are now in thatcategory.Again, p. i959, he insists that we must use newdevices ; hat (p. I960) we havedonetoolittleexperi-menting;we have closed ourmindsby fixedcategoriesof whatwe call regulation' ; and(p. 1975) noblanketformula ofregulation]houldbe applied o all.DavidCushmanCoyle, n SocialControl f Produc-tion, 206 Annals of the American Academy 121-5(Nov., 1939),advocatesa general xtensionof thepub-lic utilitycategory o includea widerangeof necessarymonopoliesbut he goes on to say (p. 125) that theyshouldbe sociallycontrolled, xcluded romcapitalistmotivations,detachedfromallconcernwith bookprof-its, and ultimately destined for public ownership.It is obviousthat Mr.Coyleenvisagesa typeof regula-tion quite different from traditional public utilityregulation,whichdoes not excludecapitalistmotivationsand concernwith bookprofits,or necessarily ead topublicownership.



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20 THE JOURNALOF LAND & PUBLIC UTILITY ECONOMICSdifferent and the complications morenumerous?If additionalsectorsof oureconomyneed to be broughtwithin theorbit of publiccontrol,would it not bemorerealistic o fashionnewinstitutionsfor this purposeratherthan to relyon amodel that has outlived its usefulness?The view that the publicutility con-cept is tendingtowardobsolescenceandsupersessionshould not, as one criticfeels,31 e construedas pessimisticor asindicating the inevitability of publicownership.All institutionsaresubjecttothe same evolutionaryprocessin a dy-namicsociety. They arisein response odefinitesocialneeds,servefora timethepurposesfor which they were created,eventuallybecome mpotentor actuallydetrimental,andaregraduallydisplacedby new institutions designed to meetnewneeds.The observationandanalysisof this processin the economicfieldareproperfunctions of the economist andshould be the objects of scientific in-quirydevoidof emotionalpredilections.One may experiencea certainnostalgiafor familiar institutions and apprehen-

31 When this paper was presented in rough outlineform at the Mid West Economics Association meetingin Des Moines, Iowa, April, 1939, Professor Sidney

sion concerningnew ones, but this is anemotionalreaction,not a scientific udg-ment.Thepassingof anobsolete nstitu-tion, althoughit may be noted with re-gret, is on the whole a properbasis foroptimism,becauseit clears the way forthe development of new institutionsthat are betteradaptedto contemporaryneeds. The exact nature of these newinstitutions is neither predictablenorinevitable. Their form will be deter-mined by the interplay of numerousforces,manyof whichcannotbe clearlyforeseen or evaluated. Hence, in thepresent instance, there is no reason tosupposethat the publicutility conceptwill be displacedexclusively by publicownership. f the spiritof institutionalinventiveness is given a free rein, manynew types of control, not heretofore con-templated, may be developed. Thesemay differboth from public utility regu-lation and from present forms of publicownership. The latter is merely one ofseveral possible alternatives and is by nomeans inevitable.Miller of the University of Iowa felt that its implica-tions were unduly pessimistic and that it pointed topublic ownership as the only available alternative.

the passing of the public utility concept

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