users of gas grew more numerous, however; gas companies became rich and powerful; and then there began to creep into the industry those abuses which have become by-words among us. As the other public service industries arose, they, too, became tainted with the same abuses; extortionate rates, discrimination, over-capitalization, poor service, and corruption of public officers. These abuses need no description.

3. FAILURE OF COMPETITION TO REGULATE PUBLIC

UTILITIES

Many thinkers still hold to the idea that competition is an efficient means of regulating business; that if competition could be ensured, business would need no governmental supervision. In the early days of public service companies few people saw any reason to believe that competition would fail to bring about low prices and good service from such companies. Not until competition had proved itself ineffectual in this field, and it had been demonstrated that these industries are "natural monopolies", could the majority of men align themselves either for public ownership or for private ownership under regulation. For it is clear that monopolies must be either owned or controlled by the public, whereas in competitive industries regulation is not so clearly needed.6

The history of the gas business in New York City shows clearly the failure of competition in such an industry. In 1823 was formed the New York Gas-Light Company, the first of its kind in the city. Competition was the order of the day, and soon other companies entered the same field, even laying pipes in streets already served by other concerns. In 1883 there were eight gas-light companies in the city, and in the street-railway business conditions were quite similar, competing lines paralleling each other at the distance of a single block. By this time the gas companies had found that competition produced such deplorable conditions that they prayed the legislature for permission to consolidate. Authority was given, and seven of the eight

"As Professor John H. Gray, recently in charge of the National Civic Federation's investigation, has often said: "Competition and regulation are inconsistent with each other."

formed a merger in 1884. Meanwhile abuses in the service had been growing apace. In 1869 the state assembly had investigated the gas companies in the city and had found poor service coupled with extortionate prices and reckless financiering. Again in the early eighties complaints against the gas service were increasing; in 1884 they were all directed against the new gas merger; and in 1885 the state Senate appointed a committee of three to investigate.8 In the hearings before this committee it was clearly proved that competition had failed to give the city cheap gas. It was shown that high prices, poor service, and eventual consolidation always result from competition. There are numerous other instances of the inefficacy of competition to regulate such an industry, and in no case has competition in public services been an unmixed blessing.10

"New York Gas Investigation Report (1869).

New York Gas Investigation Report (1885).

"The following colloquy is drawn from the published proceedings of the investigation of 1885. Mr. James H. Armington, of the Brooklyn Gas-Light Company, was answering queries put to him by members of the Committee and others:

Q. What, in your opinion, is the effect of competition between gas companies in large cities like New York and Brooklyn?

A. So far as I have looked into the subject, I have never known of an instance where it did not increase the price of gas.

Q.

A.

Explain to the Committee why.

It seems to me patent to everybody why; if a gas company, for instance, lays a main upon Broadway, or any other thoroughfare of sufficient dimensions to supply all the gas to that thoroughfare, that capital is already expended, and, if anybody else comes in and lays pipes in the same place, somebody has got to come in and pay the interest on that additional capital, and that somebody is the consumer generally. Q. And there is useless duplication of capital?

A. Yes, sir; in our case seven times over.

Q. Do you think if a few enterprising gentlemen should start additional companies, that the public would be compelled to pay for their recklessness?

A. If they chose to take gas; there is the capital expended on which somebody must pay interest as long as the competition lasts; you can see if the proprietor of this hotel had just enough guests to fill it, and he went across the street and bought another piece of property and built a hotel, he would have to charge these guests enough to cover the outlay.

Q. I suppose you mean that although there may be a sharp competition in time, that failing that, there will be either a pooling or a division of the territory, as in the city of Brooklyn?

A. Yes, sir.

Q. And there is no alternative left to the public except paying?

Q.

I think consolidation at all times, of any corporations, is ruinous to the public? We know no persons who are so much to blame as the legislature supplying the charters.

A.

10 Annals of the American Academy (1895), v. 6, pp. 553-54; editorials in Engineering News, vol. 57. pp. 595, 651, for May 30, and June 13, 1907: New York Gas Investigation Report (1885), appendix pp. 130-33, 151-58; E. H. Downey, Regulation of Urban Utilities in Iowa, p. 18 (gives an instance from LaCrosse, Wisconsin, 1901).

Men who had studied the problem had, by 1880-90, come to see clearly that competition in these industries is impossible. The phrase "natural monopoly" begins about this time to appear more frequently in the literature on the subject, and the idea it contained slowly spread through newspapers and magazines to the mass of the voters. Nevertheless, the old error died hard, is not yet wholly extinct, in fact; and it is now clear that promoters of new companies and inventors with patents to sell allied themselves with popular ignorance and conservatism to keep alive the old fallacy of the efficacy of competition.11 As late as 1879 a local rapid transit commission advised the mayor of New York that the "public interest demands a healthy competition as an essential part of the rapid transit system,"12 while the state legislature in 1885 ignored the advice of the Senate committee to end competition and tried to re-establish competition by fiat of law.13

When by the slow process of education a majority of interested people had at last perceived the futility of competition. in public service industries, these became thoroughly hated, as monopolies have ever been hated, and there was then a fairly quick alignment of forces. These monopolies must be controlled; should it be through public ownership or by governmental regulation ?14

4. SLOW PROGRESS OF THE MUNICIPAL OWNERSHIP

MOVEMENT

Roughly speaking, from 1890 to 1907 municipal ownership. was in great favor as the true solution of the public utilities problem. The movement was not new in 1890, nor is it dead or even dying now; but before that year the issue was beclouded by the belief in competition, and since 1907 regulation by expert commissions has apparently had a larger following

"See J. H. Gray, "The Gas Supply of Boston," in the Quarterly Journal of Economics, vols. 11, 12, 13; New York Gas Investigation Report (1885), appendix pp. 151-58.

12See Annual Report of the First District Commission, for Year Ending Dec. 31, 1907, vol. 1, appendix J, pp. 454-68.

Ibid., pp. 451-52, and New York Gas Investigation Report (1885), p. 29.

14E. W. Bemis, Municipal Monopolies (1899), pp. 631-80. His opening sentence is: "From what has gone before, it is evident that there must be either strict regulation or public ownership, with or without public operation, of city monopolies."

than public ownership. During this seventeen-year period those who urged regulation rather than ownership were increasing in number but were still distinctly in a minority. Municipal ownership seemed to have a clear field, and some explanation must be made of its failure to gain immediately the success which some men wished it.

The movement was opposed by the more wealthy and conservative elements in each community as a matter of course. This opposition was often unscrupulous in the means used to defeat municipal ownership; it frequently prevented legislatures from authorizing cities to municipalize local industries, and, if defeated in that, it fought the issue in the local elections, the local councils, and the courts. It circulated considerable literature, much of it truthful, to prove the failure of municipal ownership where tried, and, in cases of direst need, it could reduce prices or improve the service and thus partially remove the objections to private ownership. Meanwhile those who supported municipal ownership were not the richest men; many could be discredited with conservative people by being called socialists, visionaries, and doctrinaires. Individualistic ideas were still strong. Moreover, the numerous exposures of corruption in city government which came at this time had tremendous weight as an argument against the movement. The people would not burden themselves with large debts merely to give to inefficient, and apparently broken-down city governments additional opportunities for mismanagement. It could also be proved that in the United States, at least, public ownership had not been uniformly successful. Laboring under these disadvantages, the movement made slow progress, while the need of some action grew increasingly evident. For immediate relief, some other solution of the question was demanded.15

5. PUBLIC REGULATION OF UTILITIES

LEGISLATURES AS THE REGULATING AUTHORITIES

Even while men continued to believe in competition as a preventative of, or remedy for, abuses in public service management,

The dates given in this discussion are necessarily only approximate. The year 1907 saw, indeed, the first of the real public service commissions, but regulation had not yet won even a temporary victory over public ownership.

various modes of regulation were also being tried.16 Local and state legislatures, by means of carefully drawn franchise grants, and by legislation under the police power, strove with increasing honesty and diligence to control the affairs of public service companies and to protect the public against abuses. But their success was small, especially in the case of municipal councils, and for this the courts are at least partially responsible. However, legislatures are not adapted to the work of regulation of public service corporations, and their failure is therefore not due to such exceptional causes as corruption and inefficiency, but is the rule which will continue while legislatures are legislatures. These are large bodies, made up of honestly prejudiced representatives, not impartial experts, meeting only occasionally and having much work to do in a short time. Public service corporations are in operation every day, and, if they need regulation, they must be regulated by a body of equal permanence, as well as equal watchfulness, equal knowledge, and equal power. A legislature is not such a body.17

RISE OF PUBLIC SERVICE COMMISSIONS

The New England and middle eastern states, first to become densely populated, industrial communities, felt first the need of regulating public service corporations. New York and Massachusetts were early experimenters in this field, the railroad problem first attracting their attention. In 1855 New York created a Railroad Commission of three members with supervisory powers. After two years it was abolished.18 In 1869 Massachusetts created its successful Railroad Commission.19 In the same year a committee of the New York Assembly, after an in

This seems illogical enough if we accept the doctrine that competition and regulation are inconsistent with each other.

Mr.

17On the failure of legislatures to give proper regulation, see a brief discussion in C. L. King, The Regulation of Municipal Utilities (1912), pp. 18-22, 190-200. King discusses in these pages also regulation by law-suit and by initiative and referendum. A fair reading of Mr. Stiles P. Jones' article on "The Minneapolis Gas Settlement" (reprinted in Mr. King's volume, pp. 56-72), though it is written by one who opposes state public service commissions, will serve to show why local legislatures fail. The failure of state legislatures to regulate utilities effectively is brought out in the New York Gas Investigation Reports of 1869, 1885, and 1905. This history will be touched upon

later.

18 See Annual Report of the Public Service Commission for the First District for the Year Ending Dec. 31, 1907, vol. 1, pp. 452-4.

"See Frank Hendrick, Railroad Control by Commissions.