The Passing of the Public Utility Concept

Author(s): Horace M. Gray

Source: The Journal of Land & Public Utility Economics, Vol. 16, No. 1 (Feb., 1940), pp. 8-20
Published by: University of Wisconsin Press
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 The Passing of the Public Utility Concept
By HORACE M. GRAY*

T HE term "publicutility concept"is In the twentiethcenturythis processhas

used herein a broadsense to denote continuedby means of federalgrants of
that body of economic,social, and legal exclusiverights to exploit particularsec-
ideas which together constitute the in- tors of the publicdomain:hydro-electric
stitutional frameworkwithin which cer- sites (Federal Water Power Act of 1920);
tain designated enterprises operate. radio, wireless, and television channels
Viewed analytically, it consists of cer- (Federal Communications Act of I934);
tain economicandlegalassumptions,cer- public highways (Motor Carrier Act of
tain social objectives sought to be at- I935); and airways (Civil Aeronautics
tained, and certain administrativeand Act of I938).' The states, following the
legal proceduresdesigned to implement same theory, granted corporate charters
these abstractionsand to give themfunc- of extreme laxity; municipalities granted
tional vitality for purposesof social con- perpetual or long-term franchises of ex-
trol. These assumptions,objectives,and clusive character. In general, the recipi-
procedureswill be examined critically ents of these privileges were given prac-
with a view towarddeterminingwhether tically a free hand in respect to organiza-
or not they provide a satisfactory basis tion, finance, and price policy. They
forpublicregulationin the modernecon- followed the historic behavior pattern of
omy. No attempt will be made to trace all holders of special privilege and the
the evolution of these ideas throughthe final result was monopoly, exploitation,
literature;rather,it will be assumedthat and political corruption. These aggres-
the publicutility concept, in its modern sions eventually became so apparent and
Americanform,is a productof the late so onerous that a widespread demand for
nineteenthandearlytwentiethcenturies, legislative restraint arose, in response to
and that subsequent modification has which the Granger Laws, Interstate
not changedmateriallyits essentialchar- Commerce Act, Sherman Law, and the
acteristics. first state public utility statutes were en-
During the nineteenthcentury, in re- acted. Each sought in its own way to
sponse to the dominantbelief that pub- curb certain obvious manifestations of
lic interest would be best promotedby monopoly.
grantsof specialprivilegeto privateper- Although these laws differed in many
sons and to corporations,the Federal respects-differences with which the
Government,by gift, or sale for nominal present discussion is not concerned-
sums, alienated in fee simple, and with- they had one feature in common. They
out reservation of public right, the major all followed the delusion that private
portion of the public domain. This basic privilege can be reconciled with public
privilege was supplemented by further interest by the alchemy of public regula-
federal grants in the form of patents, tion. Consequently, none of them dis-
subsidies, banking powers, and tariffs. turbed in the slightest degree the under-
* Associate Professor of Economics and Assistant lying structure of special privilege; they
Dean of the Graduate School, University of Illinois. rights of recovery and control, past experience affords
1 Although the licenses or certificates issued under little basis for confidence in the effectiveness of such
these statutes purport to reserve to the public certain reservations.

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 PASSING OF THE PUBLIC UTILITY CONCEPT 9

merelyrearedupon it a superstructureof ance between private and public inter-

restraint. Monopoly capitalism, secure est. The fact that this theory had not
in its privileges,shook off the petty irri- worked with much success for the past
tations of regulation and continued its generationin other sectors of the econ-
aggressionsagainst the public welfare. omy seems not to have disillusionedits
Popularopinionstill adheredto the anti- advocatesor to have lessenedtheir faith
monopoly, anti-corporation tradition that it could be made to workin the spe-
but became increasingly confused and cial fieldof local utilities.
bewildered. Unable to detect the real But the publicutility conceptwent far
sourceof difficulty,peopleweredisposed beyond nineteenth century theory.
to condemn existing political adminis- Whereas formerlyit had been assumed
trations for failureto enforcethe law or that competition was generally benefi-
to believe that additional legislation of cent and should, therefore, be pre-
the same characterwouldsolve the prob- served, it was now assumed that, in
lem."2It was during this period of con- certain areas at least, competition was
fusion, and out of this conflict between undesirable and should, therefore, be
liberal ideology and the realities of mo- eradicated by state action. This new
nopolycapitalism,that the publicutility economic philosophy received general
conceptevolved.When,shortlyafterthe legislative sanction by the states be-
turnof the century,it assumeddefinitive tween the years 1907 and I920, and,
modern form in the laws of Wisconsin more recently, by the federal Congress
and New York it bore the birthmarksof in respect to interstate operations in
the political and ideologicalmiscegena- communication, electric power, motor
tion fromwhichit sprang. transport, air transport, and natural
The Conceptin the Twentieth gas. Thus, between 1907 and 1938, the
Century policy of state-created, state-protected
The public utility concept retained monopoly became firmly established
and reaffirmedthe basic fallacy of the over a significant portion of the econ-
late nineteenth century-namely, that omy and becamne the keystoneof modern
private privilegecan be reconciledwith public utility regulation. Henceforth,
the public utility status was to be the
public interest by means of public regu- haven of refugefor all aspiringmonopo-
lation. True to the liberal tradition, it
assumed a fundamental harmony be- lists who foundit too difficult,too costly,
tween private and public interest; this or too precariousto secureand maintain
being the case, specificinstancesof con- monopolyby private action alone.Their
flict were regardedas temporaryaberra- future prosperity would be assured if
tions or maladjustments which in no only they could induce government to
wise vitiated the generalrule. The "visi- grant them monopolypowerand to pro-
ble hand" of public regulationwas sub- tect them against interlopers,provided
stituted for the "invisible hand" of always, of course, that governmentdid
Adam Smith, and the continuousminis- not exact too high a price for its favors
tration of regulation, it was assumed, in the form of restrictive regulation. If
would suffice to maintain a perfect bal- political manipulationshould fail to re-
move this last source of danger, the
2 See Thurman W.
Arnold, The Folklore of Capital-
ism (New Haven: Yale Univ. Press, 1937). In Chapter combinations. The same reasoning is applicable to other
IX, Mr. Arnold shows how the anti-trust laws satis- efforts at public control, including public utility regu-
fied the prevailing ideology but actually encouraged lation.

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Io THE JOURNAL OF LAND & PUBLIC UTILITY ECONOMICS

SupremeCourt could be relied upon to and since nature was beneficent,it fol-
restrain any overly zealous regulatory lowed that they were "good" monopo-
commission. lies. Government,being responsiblefor
The obvious conflict between the tra- promotingpublicwelfarewas, therefore,
ditional ideology and the public utility justified in establishing such "good"
conceptwas resolvedby resortto ration- monopoliesand using its power to pre-
alization. It was said that enterprises vent invasion by interlopers.Moreover,
supplying gas, electricity, street trans- those who "devoted" their property to
portation, water, and telephonic com- this "good"cause were entitled to have
munication were "inherently"or "nat- the power of the state invoked in their
urally" monopolistic; that they had behalfto insurethem a "fairreturnon a
certain "natural characteristics"which fair value." A "natural"monopoly, be-
distinguished them from other enter- ing a "good" monopoly, would not be-
prises and caused them to follow differ- have after the fashionof "bad"monopo-
ent laws of economicorganization;that, lies. Subject to an occasionalpropensity
because of this "natural" force, they to indulge in excessive chargesand dis-
tended "inevitably" to become monop- criminations-aberrations that would
olies; that all efforts to maintain com- be curbed by regulation-these monop-
petition had failed and, by the very olists would organize production effi-
nature of the case, were foredoomedto ciently, utilize resourcesto the best ad-
fail. Thus, the fictionof "naturalmonop- vantage, employ the best techniques
oly" was inventedto explainthe centrip- available, maintain high standards of
etal tendencies then observable. Gov- service,developtheirmarketscomplete-
ernment, being powerlessto resist this ly, secure capital at least cost, and in
"natural" trend, must perforcebow to generalmanage their affairsto the best
the inevitable and accept "natural" interests of the public to whose service
monopolyas a principleof publicpolicy. they had "devoted"their property.The
Sucha conclusiondid not contradicttra- profitmotive, althoughrestricted,would
ditional thought for these.newmonopo- as in competitive business, provide the
lies were different;they were "natural" incentive for efficientperformance.The
whereasother monopolieswere, by con- role of the state would be entirely nega-
tradistinction,"unnatural"or artificial. tive; its interferencewould be confined
Thus, by a soothingprocessof rationali- to preventingexcessivechargesand dis-
zation, men are able to opposemonopo- criminations.
lies in general but to approve certain
Uses and Abusesof the Concept
types of monopolies.3
But one rationalizationled to others. It is difficult, if not impossible, to
Since these monopolieswere "natural" identify precisely the social objectives
8 For a brief discussion of the contribution of econ- influences, and political corruption are the institutional
omists to this rationalization see George T. Brown, ingredients from which monopoly was forged by skillful
The Gas Light Company of Baltimore (Baltimore: Johns and unscrupulous manipulators. A critical evaluation of
Hopkins Press, 1936), c. VI. See also my review of this these elements might have shed considerable doubt
monograph in 26 American Economic Review 535 (Sept., upon the 'naturalness' of this and similar monopolies."
1936) in which I pointed out that Dr. Brown had failed For a similar view, with respect to the so-called in-
to give proper attention to the institutional factors that evitabilityof industrial monopoly, see the statement by
underlie such monopolies. My conclusion on this point Leon Henderson in "Investigation of Concentration of
was: "Franchises, way-leaves, contracts, charters, pat- Economic Power," Hearings before Temporary Na-
ents, secret agreements, injunctions, dummy corpora- tional Economic Committee, Pt. 5, pp. 1974-5 (Wash-
tions, cut-throat competition, newspaper and banking ington: Government Printing Office, I939).

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 PASSING OF THE PUBLIC UTILITY CONCEPT II

of the public utility concept duringthis concerned,practicallyceasedto function;

period of confused rationalization.Cer- the policies of commissionsand courts,
tainly many of the proponentsof public particularly the latter, were calculated
utility regulationintended it to protect to promote the expansionistand profit-
consumersagainst excessivechargesand seeking activities of private enterprise.
discriminations;all the early state laws When, after 1929, the drastic curtail-
bear witness to this intent. It should be ment of consumer purchasing power
remembered,however, that behind this gave rise to a widespread agitation
laudable social purpose lurked the sin- for reduction of utility rates, commis-
ister forces of private privilege and sions and courts came to the rescue of
monopoly.They desiredimmunityfrom the hardpressedutilities and prevented,
prosecution under the anti-trust laws, or minimized,rate reductionby invoking
legal validation of their privileges as a tortured constructionof the "fair re-
property rights, the protection of the turn on fair value" doctrine.In extreme
state for their monopolies, and a rela- cases, as in railroads,rates were actually
tively free hand to extend theireconomic raisedat a time when by every criterion
power.All these objectivesthey attained of economic teaching they should have
under the public utility status.4In addi- been lowered. It thus became increas-
tion, they secured gratis something ingly apparentthat "protectionof con-
equally important-public acceptance sumers" had been supersededin large
and legal recognitionof the economicfic- measure by "protectionof property."
tion of "natural"monopoly. Recently an even more menacing and
Whatever relative weight may be as- anti-socialuse of the public utility con-
signed to these conflictingobjectives in cept has developed.In orderto preserve
pre-war legislation, it seems clear that obsoleteeconomicorganization,it is now
protection of consumersfaded into the proposedto invoke this concept to pre-
backgroundduringsubsequentyears. In vent the establishmentof alternativein-
the war period emphasis shifted to the stitutions designed to serve needs not
problemsof providing adequate service adequately provided for under existing
facilities, obtaining much needed capi- arrangements.A number of examples
tal, and adjustingrates upwardto cover may be cited to illustrate this latest
rising costs. After the war the utility in- stage of "institutionaldecadence."
dustries entered upon a boom period The railroads have long sought to
during which rapid expansion was the curbthe developmentof motortransport
guiding principle of both private and by securing its inclusion within the re-
publicpolicy. Private financiersand pro- strictive confines of the public utility
moters were concerned with new con- status. They have sponsored, and ob-
struction, finance, consolidation,elimi- tained, federal and state legislation de-
nation of residualcompetition,organiza- signed to restrictcompetitionby forcing
tion of great economic empires, and motor carriers,as a conditionprecedent
speculativeprofits.Public regulation,in to operation,to apply for certificatesof
so far as the interests of consumerswere convenience and necessity;5 the rail-
4 Burton N. Behling, Competition and Monopoly in 6 "Regulation of Motor Carriers of Persons," House
Public Utility Industries (Urbana. Univ. of Ill. Press, Report No. 783, 7Ist Cong., 2nd Sess., I930. In a minor-
1938). In Chapter IV, Dr. Behling shows how the ity report, Congressman George Huddleston described
policies of commissions and courts tended to strengthen the purpose of the proposed legislation as follows: "It
and protect monopoly without at the same time curbing [the bill] was proposed and urged by the bus operators
its aggressions. (Footnote5 continued on page 12)

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I2 THE JOURNAL OF LAND & PUBLIC UTILITY ECONOMICS

roads,of course,have opposedthe grant- or fees, sufficientto defray all costs, be

ing of such certificates. In Illinois, for levied upon those who use them.8This
example, the Commerce Commission, contention seems to have some judicial
operatingunder a public utility statute, support, as exemplifiedin the Brashear
is reportedto have granted2I exclusive case, where a lower federal court, in up-
certificates on main highways.6 This holding certain taxes levied on motor
state-creationof private monopolieson carriers, said:
the public highways aroused such pro- "The highway system owned by the state
test that the legislature,after an inves- and its subdivisionsis a public utility sup-
tigation, transferred jurisdiction over plying facilities which constitute an actual
motor trucksto the Departmentof Pub- monopoly which is subject to inter-govern-
ment regulation and control. The annual
lic Works and Buildings, and displaced cost of operating such utility should be
the public utility type of regulationby determined in the same manner as for a
policeregulationdesignedto insurepub- privatelyowned utility."9
lic safety.7 Recently, the Associationof In the field of electric power, private
AmericanRailroadshas disseminateda companies, on numerous occasions, have
report in which it is proposed that all invoked the public utility concept to
highways and waterways be declared prevent or to hinder the development of
public utilities and that privilegetaxes public organizations for producing and

(Footnote5 continuedfrom page Ir) ference, however, in "Highway TransportationRe-

and the rail carriers, and their affiliated interests. The Makes America"(Washington,1939) maintains that
main purpose of its proponents is to secure themselves the highwaysshouldbe free.It states at p. 5: "Freedom
against competition. This is to be accomplished through of the highwaysis againbeingthreatenedin the United
the device of the 'certificate of convenience and neces- States-not by toll gates erectedby menin the attempt
sity.' The proponents of the bill admitted candidly that to convert the publichighwayinto a private business,
its main purpose was to give a monopoly, to eliminate but by drasticrestrictionsand punitivetaxationwhose
competition. The main purpose of this bill is to create a effect is to curb the movementof personsand goods
monopoly in a situation which would otherwise be over the highways.Impositionof heavy burdensupon
highly competitive, and then to make of the monopoly highway users is inspiredby interests which hope to
an excuse for regulation. This legislation is merely a part profit from the resulting curtailmentof the use of
of the general effort of an important school of business highways."And again,at p. Io: "to the averageperson
men to get away from the competitive system." (Sum- free access to the highwaysseems to lie in the same
marized from pp. 16-9.) category as free access to the air and sunlight."On
Later, Joseph B. Eastman, as Federal Coordinator of p. 20 an excerptfrom the DillmanReportis quotedto
Transportation, stated: "The demand for regulation of the effect that highwaysare notpublicutilities.Where-
the motor-transport industry began with the railroads"; upon the Associationof AmericanRailroads,speaking
and "The railroads have spent too much time and atten- through its economist, Dr. C. S. Duncan, issued a
tion on plans for the restriction of their competitors and counterblastentitled "The Answerto HighwayPropa-
too little on the development and improvement of their ganda"(Washington,1939)in which, after attempting
own service and the readjustment of their own rates." to expose and discredit the National Highway Users
("Regulation of Transportation Agencies," Sen. Doc. Conference,Dr. Duncancloseswith the dire foreboding
No. 152, 73rd Cong., 2nd Sess., 1934, pp. 33 and 35.) that "unlesshighwaysare consideredas publicutilities
Moreover, there can be no doubt that the railroads and every user of the improvedhighwaysis charged
played an important role in securing the passage of the fairly for his use of these facilities,we are headeddi-
Federal Motor Carrier Act of I935. rectly for a socializedindustry"(p. 20).
6 Statement of Senator Louis J. Menges, as reported 9 BrashearFreightLines, Inc. v. Hughes,in the Dist.
in the Chicago Tribune, Dec. 14, I938. Ct. of the U.S. for the So. Dist. of Ill., So. Div., In
7 Illinois Truck
Act, Ill. Rev. Stats. I939, p. 2162. Equity DC 2273 (1938). See also Edward D. Allen,
8 "Highway Costs," Assn. of Amer. Railroads, Jan. "HighwayCosts and TheirAllocation,"I5 Journal of
30, 1939; see especially c's I and II. The Transportation Land & Public Utility Economics 269-76 (August,
Association of America, in "A National Transportation 1939) and 404-I5 (November, 1939). Professor Allen
Program," Vols. I and II and Supp. No. I (Chicago, favors the public utility approachand, after outlining
1938), urges that all forms of transport be brought under the theoretical justification for this view, attempts to
uniform regulation administered by the Interstate Com- derive a practical formula for allocating costs to high-
merce Commission. The National Highway Users Con- way users.

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 PASSINGOF THE PUBLICUTILITY CONCEPT I3

distributing electricity.'0 They have eral Governmentdesigned to serve eco-

agitated unceasinglyto secure inclusion nomic and social needs entirely outside
within the public utility category of the public utility concept, should be
municipal electric systems so that the amenable to the public utility laws of
latter, despite their institutional dis- Tennessee and Alabama.13They have
similarity, can be forced to conform to harassedthe Authority with continuous
the same rules and regulationsthat gov- propaganda, litigation, and investiga-
ern private operations." They have tion, much of which has been based
sought to block municipal competition on the charge that its policies with
by the plea that their franchises and respect to costs, rates, finance, taxes,
certificates are exclusive.l2They have promotional expenses, and accounting
even maintained that the Tennessee differ from those followed by private
Valley Authority, an agency of the Fed- companies.14They have attempted to
10An investigationby the FederalPowerCommission legal, the ruleof damnumabsqueinjuriaapplied.Again,
revealsthat privatecompanies,fromI88I to 1935,filed in 1939, in Tenn. Elec. Power Co. v. TVA, - U.S.
278 petitionsfor injunctionsagainstI95 publicauthor- -, 83 L. ed. -, 59 S. Ct. 366, 27 P.U.R. (N.S.) I,
ities to restrainthem fromconstructingelectricplants. the private companyrelied in part on the Frost doc-
Of thesepetitionsonly 90 werefiledduringthe 50 years trine. But, once again, Mr. Justice Roberts speaking
from 188I-I930; the remainder, or I88, were filed be- for the majority,the Courtheld that the Frost casewas
tween I931 and 1935. ("Restraining Orders and Injunc- inapplicableand reaffirmedthe doctrine of damnum
tions Instituted against Public Electric Projects," absqueinjuria. Mr. Justice Butler, however,speaking
Sen. Doc. No. I82, 74th Cong., 2nd Sess, 1936.) for himselfand Mr. Justice McReynolds,dissentedon
11In 1935, I2 state utility commissions claimed gen- the groundthat the Frost case was applicable,and that
eral, and nine otherspartial,jurisdictionover the rates the competitioncomplainedof was illegal and, hence,
of municipalelectricutilities (FederalPower Commis- unconstitutional.It would seem, therefore,that the
sion, Rate Series No. 6, I935, pp. 2-4). For a recent Frost doctrine, although never expressly repudiated,
judicialdecision,in which a state supremecourtexplic- has been abandoned,for the time being at least, in
itly repudiatedthis contentionand held that municipal favor of the rule of damnumabsqueinjuria. For a
electricsystemsarenot publicutilities,see Birmingham criticismof this latterdoctrine,andan expositionof the
Elec. Co. v. City of Bessemer, - Ala. -, i86 So. 569, private utility point of view, see WilliamM. Wherry,
28 P.U.R. (N.S.) ISi (I939). "Federal Competition May Be Unconstitutional-
12 Ala.
Power Co. v. Ickes, 302 U.S. 464, 82 L. ed. but?" 24 Public Utilities Fortnightly 3-12 (July 6, I939)
-, 58 S. Ct. 300, 2I P.U.R. (N.S.) 289 (1938); Duke and 24 Ibid. 84-91 (July 20, I939).
PowerCo. v. Greenwood
County,302 U.S. 485, 82 L. ed. 18 Tenn. Elec. Power Co. v. TVA, supra n. 12.
-, 58 S. Ct. 306, 21 P.U.R. (N.S.) 298 (I938). 14These chargesculminatedin an investigationby a
In these two cases a formerdecisionof the Supreme Joint CongressionalCommittee,pursuantto Pub. Res.
Courtrose to plagueit. In 1929,in Frostv. Okla.Corp. 83, 75th Cong. The majorityreportrecognizesclearly
Corn., 278 U.S. 5I5, 49 S. Ct. 235, P.U.R. 1929 B 634, the inherentdifferencesbetweenTVA and privateutil-
the Court had held that a license to operate a cotton ities. The three minoritymembers,however,refuseto
gin, grantedundera state publicutility statute, was a concedesuch distinctionsand insist that TVA should
propertyright within the protectionof the Fourteenth be subject to regulationin the same manneras private
Amendmentand was exclusiveas againsta farmers'co- companies.In theirown words:"It shouldbe underthe
operative ginning company. Mr. Justice Brandeis regulationof local State utility commissionsand the
(HolmesandStoneconcurring)dissentedon the ground FederalPower Commissionin substantiallythe same
that a farmers'cooperativewas entirelydifferentfroma manner as private utilities are under such regula-
commercialestablishmentand, hence, the discrimina- tion.... The TVA should be required to fix reasonable
tory classificationof the Oklahomastatute in question rates that wouldcoverall costs, includingoperatingex-
wasjustifiable.Mr.JusticeStone (Holmesand Brandeis penses,intereston the investment,taxes, and deprecia-
concurring)wrotea separatedissentingopinionin which tion or amortization.It should pay all Federal,State,
he developed the doctrineof damnumabsqueinjuria. and local taxes in the same way as taxes on similar
When,in 1938,the Alabamaand Dukecompaniesrelied private propertyis [as printed]computed.We recom-
on the Frost case to substantiatetheirclaimthatmunic- mend that the TVA define its area of distributionso
ipal competitionthreatenedto destroy their property that presentuncertaintymay be removedand the pri-
and, hence, contravenedthe FourteenthAmendment, vate utilitiesin adjoiningareasfeeljustifiedin making
Mr. Justice Sutherland, speaking for a unanimous much-neededinvestments for improvementsand ex-
Court, held that the Frost doctrine was inapplicable pansions." (Report, p. 277.)
and that, since the competition complainedof was (Footnotez4 continuedon page 14)

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14 THE JOURNAL OF LAND & PUBLIC UTILITY ECONOMICS

block the organizationof rural electric threaten the security of existing organi-
cooperativesby contendingbeforecom- zations may be observedin other fields.
missions and courts that the latter The radio industry,desirousof monopo-
should be classified as public utilities lizing the air but fearful that its tem-
and forced to obtain certificatesof con- porarylicenses may be revoked or that
venience and necessity-which grant public broadcastingmay be established,
the privatecompaniesare,of course,pre- may ultimately seek refugein the public
paredto oppose.Althoughthis attempt- utility concept.'7The real estate inter-
ed perversionof the public utility con- ests of Chicago,in an effort to frustrate
cept ultimately failed in most jurisdic- public housing, recently conducted an
tions, it has resultedin protracteddelays active but unsuccessfulcampaignfor the
and considerableexpense to the rural creation of "public service housing cor-
cooperatives.15Though generally de- porations."'8 The milk monopolists, un-
feated in this major attack, the private able to suppresscompetitioncompletely,
powercompaniesare still able, underex- unable to appease the exploited farmers
isting laws, to continue their program of and consumers,threatenedin some areas
harassment by securing from some com- with municipal and cooperative distri-
missions permits for extensions that cut bution and under indictmentor investi-
through territory blocked out for uni- gation for restraint of trade, may soon
tary development by cooperatives.l1 findit expedientto seek admissionto the
The same tendency to invoke the pub- publicutility status, provided,of course,
lic utility concept in order to forestall that the conditionsimposed by govern-
the development of new institutions that ment are not too onerous.19
(Footnote14 continuedfrom page 13) 17Frank Waldrop and Joseph Borkin, Television-A
On April 5, 1939, Rep. Rankin of Mississippi charged Strugglefor Power (New York: William Morrow & Co.,
in the House that the minority report had been "ghost 1938), c. 22.
written" by private utility propagandists. Rep. Jenkins 18Illinois Sen. Bill 264, introduced March 29, I939;
of Ohio, a minority member of the Committee, denied see Chicago Tribune, March 30, I939. These corpora-
this. (See CongressionalRecord.) Drew and Pearson, in tions were to be given a broad power of eminent domain,
their syndicated column, "Washington Merry-Go- a relatively free hand in building construction and oper-
Round," of April 5, 1939, made the same charge. ation, and their rentals were to be fixed in accordance
16Re West Tenn. Power & Light Co., I8 P.U.R. (N.S.) with the public utility formula. It was charged by the
369 (I937); Ala. Power Co. v. Cullman County Elec. opposition, and never successfully refuted, that the real
Membership Corp., I9 P.U.R. (N.S.) 464, 234 Ala. 396, purpose was to block out large slum areas in Chicago
174 So. 866 (I937); Carolina Power & Light Co. v. so that land could not be secured for public housing.
7ohnston County Elec. Membership Corp., 20 P.U.R. Compare with the strict provisions of the existing Illi-
(N.S.) 208, 211 N.C. 717, 192 S.E. 105 (I937); South- nois statute governing private housing corporations,ap-
western States Tel. Co. v. Okla. Inter-County Elec. Coop., proved July 12, I933 (Ill. Rev. Stats. 1939, p. 922). For
27 P.U.R. (N.S.) 321 (1938). propaganda in favor of these "public service housing
The West Virginia Commission is one of the few that corporations," see Chicago Tribune, beginning Dec. 14,
have insisted that rural electric cooperatives are public I938 and continuing through June, 1939.
19 In 1935 I considered this question on its merits and
utilities and must show cause in order to obtain a certif-
icate of public convenience and necessity (Re Harrison reached the conclusion that the distribution of milk
Rural Electrification Assn., Inc., 24 P.U.R. (N.S.) 7 should not be a public utility. (Horace M. Gray,
(1938)). "Should the Distribution of Milk be a Public Utility?"
16 For a vigorous discussion of the obstructionistic Dairy Manufacturers ConferenceManual (Urbana, Univ.
tactics of private power companies against rural co- of Ill., Jan. 21-25, I935).) This judgment is not in agree-
operatives see Annual Report, Rural Electrification Ad- ment with the more favorable view expressed a year
min., 1938, pp. 5-6, 76-83, and 94-105. For a special later by Professor W. P. Mortenson in "Distribution of
form of obstruction-namely, refusal to grant satisfac- Milk under Public Utility Regulation," 27 American
tory wholesale rates to rural cooperatives-see W. Clar- Economic Review 22-40 (March, I936). At pp. 39-40,
ence Adams, "Electric Cooperatives Scan Wholesale Professor Mortenson says that distribution of milk as
Power Rates," 22 Public Utilities Fortnightly 368-77 a public utility can succeed if all the interested parties
(Sept. 15, 1938). (Footnote 9r continued on page 5)

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 PASSING OF THE PUBLIC UTILITY CONCEPT IS

The air transport companies have protectionhas been thrownaroundpub-

been brought within the public utility lic utility monopolists, proclaim that
categoryto the extent that they are now agricultureshouldbe a publicutility and
being given exclusivecertificatesof con- shouldreceivethe same protection.22
venience and necessity.20 The radio Enoughperhapshas been said to dem-
broadcastinginterests, having built up onstrate the "institutional decadence"
nation-widesystemsundera six months' of the public utility concept. It origi-
licensing arrangement, are dissatisfied nated as a system of social restraintde-
with their insecurity of tenure and are signed primarily,or at least ostensibly,
demandingindeterminatecertificatesof to protect consumersfrom the aggres-
exclusive character.21 The chronically sions of monopolists;it has ended as a
chaotic bituminous coal industry has device to protect the property,i.e., the
sought and obtained a measureof gov- capitalizedexpectancy,of these monop-
ernmental protection under the Guffey olists from the just demandsof society,
Act; although this form of control does and to obstruct the developmentof so-
not coincide with public utility regula- cially superiorinstitutions. This perver-
tion, it goes far in the same direction. sion of the public utility concept from
Likewise, the restriction and proration its originalpurposewas perhapsinevita-
schemesnow in vogue in the oil industry ble under capitalism. Here, as in other
resemble public utility regulation in areasof our economicand social life, the
some respects, althoughthey do not in- compellingsanctionsof private property
volve fixationof profitmarginsor prices and private profit, working within a
by government.From the same point of framework of special privilege, deter-
view, the whole NRA experimentmay mined the directionand outlook of pub-
be regardedas an effort by big business lic policy. Just as in the days of the Em-
to secure legal sanction for its monop- pire all roads led to Rome so in a capi-
olistic practicesand to invoke the pow- talistic society all formsof social control
er of the Federal Governmentto assist lead utlimately to state protectionof the
in suppressing competition. Even cer- dominant interest, i.e., property. The
tain farm groups, finding themselvesin public utility concept has thus merely
desperate economic straits and observ- gone the way of all flesh.23
ing how the mantle of governmental extra-legal monopolies are tolerable evils; but private
monopolies with the blessing of regulation and the sup-
(FootnoteI9 continuedfrom page 14) port of law are malignant cancers in the system." He
cooperate to make it succeed. This last condition, how- goes on to affirm that such regulation leads inevitably to
ever, begs the question, for experience shows that this fascism; he advocates the stamping out of private
is the very thing they will not do. After a reexamination monopoly and the public ownership of railroads and
of this question in the light of recent experience with utilities. A similar view is expressed by Professor Clif-
ford T. James in "Commons on Institutional Eco-
public utility control, I am more than ever convinced
that it would be a mistake to apply the public utility nomics," 27 American Economic Review 61-75 (I937).
The Federal Trade Commission has recently deemed
concept to the distribution of milk.
20 Oswald Ryan, "The Civil Aeronautics Act of 1938," it necessary to warn against the application of this doc-
trine to the steel business: "The classification of in-
23 Public Utilities Fortnightly 5i5-25 (April 27, 1939).
21 Chicago Tribune, April 30, 1939. dustries as necessary [natural] monopolies should be,
22A federal bill of this character, the so-called "cost in the Commission's opinion, kept to as narrow limits as
of production" plan, is reported to have been approved technical considerations permit.... The Commission
therefore suggests that the steel industry, which it be-
by the Senate Committee on Agriculture (Chicago
lieves to be capable of reasonably efficient operation
Tribune, March 31, 1939). without monopoly, should be definitely separated in
u Professor Henry C. Simons in "The Requisites of
Free Competition," 26 American Economic Review public policy from the 'natural' monopolies, and treated
68-76 (March, 1936) at p. 74 holds that: "Unregulated, (Footnote23 continued on page z6)

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16 THE JOURNAL OF LAND & PUBLIC UTILITY ECONOMICS

Obsolescence of the Concept functionallyimpotent in the sense that

But aside from its perversion to anti- it is incapableof securingthe social ob-
social ends, the public utility concept is jectives that are essential in the mod-
obsolete from another point of view. As ern economy. When any institution
previously noted, it was designed to at- reaches this advanced state of obsoles-
tain limited objectives by negative cence,it tends to be supersededby some
means. One may read the early public new institution that is more positive in
utility statutes in vain to discover any characterandbetteradaptedto the needs
express mandate for the positive promo- of the time; such a processof gradualsu-
tion of public welfare; the whole tenor persessionseems now to be under way.
of these laws is negative and restrictive; Within recent years the "institutional
they prohibit certain obvious forms of inventiveness" of political leaders and
monopolistic misbehavior but fail to im- public administratorshas produced a
pose definite responsibility for socially number of such new institutional ar-
desirable action. Thus, public utility rangements.Among these are: direct ac-
companies are under no legal compulsion tion by departmentsor bureaus of the
to conserve natural resources, to utilize Federal Government to supply needed
capital efficiently, to employ the best facilities; public corporationschartered
known techniques and forms of organi- under both federal and state authority;
zation, to treat labor fairly, to extend multiple-purpose, regional, water-con-
service to non-profitable areas, to im- trol projects;ruralelectriccooperatives;
prove public health, to strengthen na- federal grants-in-aid; federal-state-mu-
tional defense, to promote technical re- nicipalcooperation;Public Worksloans-
search, to provide service to indigent and-grants;ReconstructionFinanceCor-
persons, to institute rate and service poration loans; and federal subsidy for
policies that will foster cultural and so- desirableservices. None of these comes
cial values, or to develop related bene- within the traditionalpublic utility con-
fits such as navigation, flood control, and cept; they all involve direct, positive ac-
irrigation. This being the case, private tion ratherthan merenegative restraint;
utility monopolosits will have regard for they are relatively immune from re-
these broad social objectives only when strictive, judicial interpretationof the
by so doing they can increase or main- propertyand due processclauses of the
tain their own profit. Experience has Fifth and FourteenthAmendments;in-
shown that they will not voluntarily stead of relyingexclusivelyon the police
strive to attain these ends; moreover, it power of the states and the commerce
is clear that public utility regulation, as powerof the FederalConstitution, both
at present constituted, cannot compel hitherto narrowlycircumscribedby the
them, against their own interest, to do SupremeCourt,they call into play other
so. Thus, the public utility concept is more positive and less restrictedpowers
cover such enterprises, and they were placed under spe-
(Footnote23 continuedfrom page 15) cial government regulation.
as a free enterprise." ("Investigation of Concentration "But the classification soon became a veritable Pan-
of Economic Power," op. cit., Pt. 5, p. 2199.) dora's box.. . the qualifications necessary for admis-
An English critic describes the fictional character of sion to the box have changed so constantly that its
the public utility concept as follows: "In these cases present contents form a very ill-assorted miscellany,
(natural monopolies) it seemed best to countenance un- ... and the nature of additions thereto is quite unpre-
righteousness but to limit the plunder. A pompous and dictable." (A. S. J. Baster, The Twilight of American
question-begging name-'business affected with a pub- Capitalism (Westminster: P. S. King & Son, Ltd.,
lic interest'-was therefore invented by the lawyers to 1937), P. 27.)

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 PASSING OF THE PUBLIC UTILITY CONCEPT 17

of the FederalGovernment,such as the concept. It is generallyrecognizedthat

proprietary,finance,public welfare,and the solution of these problems will re-
national defense powers. In every re- quire governmental action of a quite
spect, therefore,these new institutional different order than that involved in
devices appear more capable of serving public utility regulation. This action
modern social needs than do private must be positive and creative, it must
monopoliesoperatingunder public util- call into play powersof governmentnot
ity regulation.24 heretoforebroughtto bear, it must rest
Anotherrelatedmovementthat points upon a solid basisof economicand social
in the same generaldirection is the rise planning, and it must be free from the
of creativeeconomicplanningby govern- creeping paralysis of judicial interfer-
ment. Under the prevailing system of ence.
monopoly capitalism,private enterprise Even the Supreme Court, the legal
seems to have lost, in large measure,its progenitorof the public utility concept,
power to plan constructively for pro- appearsto entertainsome doubt con-
gressive improvementof the economy. cerning its own handiwork. In a long
This failureis observablein many areas series of cases, from Wolff Packing Co.
and, in the utility field,is most apparent v. Kansas Industrial Commission in
in connectionwith water resources,elec- I92225to New State Ice Co. v. Liebmann
tric power, natural gas, communication, in I932,26 the Court used the public
and transportation.Now this is a fatal utility concept as a closed legal category
weakness, for when private enterprise with which to invalidate efforts of the
falters in the performanceof this all- states to regulate certain types of busi-
important creative function, govern- ness. This narrow, legalistic interpreta-
ment must assume this responsibility, tion evoked a rising tide of criticism,
ideologiesto the contrarynotwithstand- both within and outside the Court,
ing. No one who has studied this phase which reached a peak in the classic dis-
of the problem carefully can fail to be senting opinion of Mr. Justice Brandeis
aware of the serious shortcomings of in the Ice case. Finally, in Nebbia v. New
privateenterprisein theseareas,or of the York (I934),27 Mr. Justice Roberts, for
significantprogressmade within recent the majority practically abandoned the
years by governmental planning. No traditional position. Admitting explicitly
one today believes seriously that the that the milk business was not, and
scientificcontroland utilizationof water never had been, considered a public util-
resources,the perfectionof socially ade- ity, he held, nevertheless, that the state
quate national systems of electricpower of New York, if the legislature saw fit to
and electric communications,the con- do so, could fix the price of milk without
servationof naturalgas, and the ration- contravening the Fourteenth Amend-
alization of our chaotic transportation ment. In short, the question whether or
system can be accomplishedby private not the milk business was a public util-
enterprise operating within the frame- ity, or of such nature that it could prop-
work of the traditional public utility erly be so classified, was irrelevant to the
24 Horace M.
Gray, "Recent Changes in the Public respect than traditional methods under the public
Control of Electric Rates," 17 Journal of Business utility doctrine.
(University of Iowa) 7-IO (March, I937). In this article 26 262 U.S.,522.
I analyzed briefly the contributions of certain new in- 26285 U.S. 262.
stitutions to public control of electric rates and came to 27
291 U.S. 502, 78 L. ed. -, 54 S. Ct. 505, 2 P.U.R.
the conclusion that they are far more effective in this (N.S.) 337.

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18 THE JOURNAL OF LAND & PUBLIC UTILITY ECONOMICS

main issue. The power to regulate was ing-Commissions and courts passing upon
inherentin the state and could be exer- rates for public utilities are driven to listen
to conjectures,speculations,estimates, and
cised, both with respect to prices and guesses,all underthe name of 'reproduction
other matters, if the legislaturefelt that costs'." (P.U.R., p. 472.)
conditionswarranted.A minorityof the
Court,however,couldnot stomachsuch To illustrate the preposterous claims
legal heresy. Mr. Justice McReynolds made in the name of "reproduction
(Van Devanter, Sutherlandand Butler value," Mr. Justice Black describes, in
concurring)wrote a dissenting opinion a delightfully ironic passage, the trials
in which he restated and reaffirmedthe and tribulations of imaginary sailors at-
traditionaldoctrinethat pricescould be tempting to navigate the White River
regulatedonly whenit was clearlyshown and the "devoted" efforts of the com-
that the businessin questionwas a pub- pany to facilitate their nautical venture,
lic utility or of such nature that it could thereby creating a "value" upon which
be so regarded.The abandonmentof this the users of water in Indianapolis are
principle would, he asserted, open the expected to pay a "fair return."
door to almost unlimited public regula- Mr. Justice Frankfurter (Black con-
tion of prices. This prophecy was of curring), in a recent dissenting opinion,29
course correct but, as Mr. Justice not only declares the Smyth v. Ames
Roberts pointed out, quite irrelevant. formula for valuation "moribund" but
Certain other established features of shows how the states by various devices
the public utility concept have likewise have sought to escape it. He is prepared
been attacked by individual members of to approve the constitutionality of the
the Court. In McCart v. Indianapolis new device involved in this particular
Water Company (I938),28 Mr. Justice case-namely, the temporary rate reduc-
Black, in a caustic dissenting opinion, tion order with future recoupment if
condemned the theory of "reproduction necessary. In his own words:
value" as productive of interminable de- "the court's opinion appears to give new
lays and hopeless confusion. After com- vitality needlessly to the mischievous for-
mula for fixing utility rates in Smyth v.
menting upon the necessity for judicial Ames. The force of reason, confirmed by
prophecy to decide valuation cases, he events, has gradually been renderingthat
asked: "Can a judge be found who can formula moribund by revealing it to be
accurately devine all future prices of useless as a guide for adjudication.... At
commodities to be used for imaginary least one important state has for decades
reproductions of this company's prop- gone onand its way unmindful of Smyth v.
other states have by various
Ames,
erty?" (P.U.R., p. 47I.) He then goes on proposalssoughtto escapethe fog into which
to describe the chaotic procedure of speculationsbased on Smyth v. Ames have
valuation: enveloped the practical task of administer-
"it is exceedingly difficult to discern the ing systems of utility regulation ... The
truth throughthe maze of formulasand the statute under which the present case arose
represents an effort to escape Smyth v.
jungle of metaphysicalconcepts sometimes Ames at least as to temporaryrates. It is
conceived, and often fostered, by the in- the result of a conscientious and informed
genuityof those who seek inflatedvaluations endeavorto meet difficulties
to support excessive rates.... Completely
engendered by
lost in the confusionof language-too fre- legal doctrines which have been widely
quently invented for the purposeof confus- 29 Driscoll v. Edison & Power Co., - U.S. Light
28 302 U.S. 419, 82 L. ed. 336, 58 S. Ct. 324,21 P.U.R. -, 83 L. ed. -, 59 S. Ct. 715, 28 P.U.R. (N.S.) 65
(N.S.) 465. (i939).

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 PASSING OF THE PUBL]IC UTILITYCONCEPT 19
rejected by the great weight of economic rooted in our law and social traditions;
opinion,by authoritativelegislative investi- powerfuleconomicorganizationshave a
gations, by utility Commissionsthroughout vested interest in its preservationas a
the country, and by impressive judicial
dissents." (P.U.R., pp. 76-7.) protective device; and, as a people, our
The valuation doctrine has enjoyed a re- capacity for "institutional inventive-
markable vitality but it is difficult to see
ness" is poorly developed. Hence, the
how it can long withstand such criticism
rate of change will probably be deter-
from within the Court itself. In the
mined by our ability to originate and
meantime the states, as Mr. Justice perfect new institutions that are better
Frankfurter points out, are exercising adapted to modernneeds.
The fact, however, that the public
their ingenuity to find practicable ave-
nues of escape. utility concept is tending to be super-
seded shouldserve as a warningto those
Conclusion who propose to extend its application.
The conclusion is inescapable that the Why should an obsolete institution, one
public utility concept, as we have known that is a demonstrated failure, be ex-
it, lacks survival value in the modern tended to embraceadditionaleconomic
economy;30its limited objectives, its in- activities? What reasonis there to sup-
herent contradictions, its negative char- pose that a system of public control
acter, and its perversion to anti-social which has proved ineffectivein the case
purposes render it impotent for the solu- of transportation,power,and communi-
tion of present-day problems. Like other cations will prove successfulin the case
outmoded institutions, it seems destined of oil, coal, milk, housing, and other
to decline in relative significance and ulti- forms of enterprise?Why, at the very
mately to be superseded by new and time whenit is beingsupersededin those
socially superior institutions. But the areas where it has been operative for
"passing of the public utility concept" is many years, should it be extended to
not likely to proceed rapidly. It is deeply new fields where the problemsare quite
30Commissioner JeromeFrank,of the Securitiesand one we might call it 'ugwug'--somethingthat has no
ExchangeCommission,reachesthe same conclusionin emotionalconnotations,no past history attached to it
"Investigationof Concentrationof EconomicPower," and thereforedoesn't call to mind all the apparatusof
op. cit., Pt. 5. He suggestsat p. 1954 that the traditional our presentand, I think,largelyinadequatemethodof
kindof "publicutility regulation"ought to be severely dealing with those industrieswhich are now in that
modified,if not abandoned,and that certainlyit ought category."
not to be applied to other industries.He says (pp. Again, p. i959, he insists that we "must use new
1955-6):"It doesn'tseem to me that in facingnew and devices";that (p. I960) "wehave done too little experi-
serious problemswe need to rely solely upon mecha- menting;we have closedour mindsby fixedcategories
nisms and contrivancesheretoforeinvented,regardless of whatwe call regulation'"; and (p. 1975)"noblanket
of theirprovedpartialinadequacy.... I don't think formula[of regulation]shouldbe appliedto all."
we areobligedto fall backupon the analysesmadeyes- David CushmanCoyle,in "SocialControlof Produc-
terday that the only conceivableway of acting is by tion," 206 Annals of the American Academy 121-5
Governmentencroachmentupon the activities of in- (Nov., 1939),advocatesa generalextensionof the pub-
dustry in the particularformwe have used heretofore. lic utility categoryto includea wide rangeof necessary
.. We oughtn't, so to speak, to operateon the body monopoliesbut he goes on to say (p. 125) that they
politic with rusty or antiquatedsurgical instruments. shouldbe "sociallycontrolled,excludedfromcapitalist
... I thinkit wouldhelp our thinkingon the subjectof motivations,detachedfromall concernwith book prof-
the possibleextensionof the categoryof suchindustries its, and ultimately destined for public ownership."
if we could drop the use of the words 'publicutility,' It is obviousthat Mr. Coyleenvisagesa type of regula-
for, unfortunately,that phrasehas now associatedwith tion quite different from traditional public utility
it a certainkind of so-called'regulation.'It might help regulation,whichdoes not excludecapitalistmotivations
our thinking if we could invent some new word-I and concernwith bookprofits,or necessarilylead to
don't knowwhat the wordwouldbe; forlackof a better publicownership.

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20 THE JOURNAL OF LAND & PUBLIC UTILITY ECONOMICS

different and the complications more sion concerningnew ones, but this is an
numerous?If additional sectors of our emotionalreaction,not a scientificjudg-
economyneed to be broughtwithin the ment. The passingof an obsoleteinstitu-
orbit of public control, would it not be tion, although it may be noted with re-
morerealisticto fashionnew institutions gret, is on the whole a properbasis for
for this purposeratherthan to rely on a optimism, because it clears the way for
model that has outlived its usefulness? the development of new institutions
The view that the public utility con- that are better adaptedto contemporary
cept is tending towardobsolescenceand needs. The exact nature of these new
supersession should not, as one critic institutions is neither predictable nor
feels,31be construedas pessimisticor as inevitable. Their form will be deter-
indicating the inevitability of public mined by the interplay of numerous
ownership.All institutionsaresubjectto forces,many of which cannot be clearly
the same evolutionaryprocess in a dy- foreseen or evaluated. Hence, in the
namic society. They arisein responseto present instance, there is no reason to
definitesocialneeds, serve for a time the suppose that the public utility concept
purposes for which they were created, will be displaced exclusively by public
eventually becomeimpotent or actually ownership.If the spirit of "institutional
detrimental,and are graduallydisplaced inventiveness" is given a free rein, many
by new institutions designed to meet new types of control, not heretofore con-
new needs.The observationand analysis templated, may be developed. These
of this processin the economicfield are may differ both from public utility regu-
proper functions of the economist and lation and from present forms of public
should be the objects of scientific in- ownership. The latter is merely one of
quiry devoid of emotionalpredilections. several possible alternatives and is by no
One may experiencea certain nostalgia means inevitable.
for familiar institutions and apprehen-
31 When this
paper was presented in rough outline Miller of the University of Iowa felt that its implica-
form at the Mid West Economics Association meeting tions were unduly pessimistic and that it pointed to
in Des Moines, Iowa, April, 1939, Professor Sidney public ownership as the only available alternative.

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