·
B 384168
City of Philadelphia
Department of City Transit
A REPORT
UPON THE
PROPOSAL
OF THE
PHILADELPHIA RAPID TRANSIT COMPANY
FOR THE
EQUIPMENT AND OPERATION
OF
CITY-BUILT HIGH-SPEED LINES
AS EMBODIED IN A FORM OF ORDINANCE REVISED TO COVER THE
COMPANY'S OFFER OF DECEMBER 20, 1916
SUBMITTED TO THE SELECT AND COMMON COUNCILS OF THE
CITY OF PHILADELPHIA
MARCH 29. 1917
1837
ЧИШ!!!
ARTES
LIBRARY
VERITAS
SCIENTIA
OF THE
UNIVERSITY OF MICHIGAN
PLURIBUS
เ
TUEBOR
SI CUERIS PENINSULAM·AMŒNAM”
CIRCUMSPICE
THE GIFT OF
Philadelphia. Dept. of
HE
4491
P52
1917
City of Philadelphia.
Department of City Transit
A REPORT
UPON THE
PROPOSAL
OF THE
1
PHILADELPHIA RAPID TRANSIT COMPANY
FOR THE
EQUIPMENT AND OPERATION
OF
CITY-BUILT HIGH-SPEED LINES
AS EMBODIED IN A FORM OF ORDINANCE REVISED TO COVER THE
COMPANY'S OFFER OF DECEMBER 20, 1916
SUBMITTED TO THE SELECT AND COMMON COUNCILS of the
CITY OF PHILADELPHIA
MARCH 29. 1917
INDEX
A
PAGE
PAGE
Abatement of Taxes and Franchise Payments....
Abnormal Increase of Taxes Resulting from Abnor-
mal Increase of Assessments due to Transit De-
velopment
53
Bond Issues (Future)—Graded Sinking Fund Charges
Upon
103
Boston, Financial Conditions Underlying Transit De-
100
velopment in
31
Abolition of Exchange Tickets
86
Boston, Preferential Payments in....
106
Accumulated Dividends-Waiver of..
86
•
Additional Revenue Necessary to be Obtained by
Charge for Transfers..
Brief History of the P. R. T. Co., and the 1907
Contract
67
•
88
Brooklyn Elevated System-Net Income of....
109
Additional Revenue that Might be Derived from
Various Increases in Fare in 1924 (Estimated)....
Adequacy of Service....
104
C
41
Advantages Claimed as Inuring to City from 1907
Contract
Capital Provided by City..
43
74
Capital Provided by Company..
44
Aims of Company in the 1907 Contract.
Amendment to 1907 Contract.
• •
73
Capital, Rate at which Company has Supplied in
the Past
46
7
•
Amortization and Sinking Fund-Capital.
Amortization of New Investment by Company.
Analysis and Discussion of the Company's Proposal
Annual Cash Value of 1907 Contract to P. R. T. Co.
49
Capital Requirements of Merged System During
Period of Contract
43
9
Capital, Sinking and Amortization of..
49
33
Cause of Sudden Increase in Company's Surplus....
41
(Estimated)
75
Certainty of a Deficit to City.....
16, 17
Annual Deficits to City (Maximum).
90
Changing Alignment of Market Street Line at City
Hall
113
Annual Estimate for First Fifteen Years.
88
Annual Financial Results to City from First 15 Years'
Opertion of Unified System.
Charge for Transfers.
53
... 89, 93
Chicago, Transit Facilities in..
132
Annual Financial Results to Company from
15 Years' Operation of Unified System...
Annual Report of Department-1914 Estimate.
Annual Report of Department-1915 Estimate.
Appendices
Appendix A...
First
City-Advantages Claimed as Inuring from 1907
Contract
74
•
89, 92
98
98
79-148
•
79
City and Company, Investments Compared as a Con-
sideration in Connection with Preferential Charge
City and Company-Limitations of......
City and Company System Combined-Income Ac-
count for 49 Years...
111
30
87
Appendix B-1907 Contract.
119
•
Appendix C-Information in regard to Rapid Tran-
sit Facilities in Other Cities..
City Bonds-Issue of...
101
129
City Built Lines, Estimated Cost of....
23
Appendix D-City Solicitor's Opinion on Legality of
Proposed Contract
City Built R. T. Lines-Comparison of Various Esti-
mates of Cost of..
24
•
135
Appendix E-Report of the Special Committee on
Rapid Transit Negotiations Made to the Board
of Directors of the Philadelphia Rapid Transit Co.,
December 20, 1916
City, Capital to be Provided by.
43
City, Causes of Deficit to....
16
City, Certainty of Deficit to.
•
•
16, 17
141
City Controller's Audit..
33
Appendix F Through-Routing Bill.
Appropriations and Authorizations.
Assessments of Benefits on Land.
Audit by City Controller
•
Authorizations and Appropriations...
В
Bearing of 1907 Contract on Present Situation.
145
City, Co-operation Desired by.
14
•
• •
•
21
102
•
33
City-Estimated Financial Return to City.
City-Financial Results to, from 49 Years' Operation
of Unified System...
79
•
88
21
City Hall Changing Alignment of Market Street
Line at ....
113
City-Maximum Annual Deficits to...
90
City-Methods of Providing for Deficit to.
80
74
•
City's Position with Regard to Operation..
26
Benefits on Land-Assessment of Benefits on.
Bonds, City, Issue of...
•
102
City-Proviso Enabling City to Purchase Company's
101
Stock
114
iii
Re-classed 4-16-30 AVM
PAGE
PAGE
City, Recommendations to Prevent Deficit....
City's Deficits-Methods of Providing for……..
City's Program, New Factors Resulting from...
City Solicitor's Opinion on Legality of Proposed
Contract
16
100
29
135
as a Consideration in Connection with the Pref-
erential Charge
Comparison of Estimated Initial Investment of
City and Company in Rapid Transit Development
Comparison of Estimates...
111
111
93
City's Depreciation Reserve..
10
City-Results to from Operation of Sinking Fund..
City's System-Depreciation Reserve for Construc-
58
tion of
117
City Taxes
100
•
Comparison of Estimates of Cost of Construction..
Comparison of Estimates (Tabulated).....
Comparison of Financial Results of Department Esti-
mates Under Various Programs of Construction
and Operation
95
99
.82, 97, 99
City's Undertaking, Status of..
21
City Virtually Asked to Lease Company's System..
Company and City, Investments Compared as a
Consideration in Connection with Preferential
Charge
36
Comparison of Income Prior to Charging of Prefer-
ential
108
Comparisons of Various Estimates of Cost of City-
built R. T. Lines...
24
111
Company and City-Limitations of..
30
•
Concessions Obtained by P. R. T. Co. in 1907 Con-
tract
75
Company and City System Combined-Income Ac-
count for 49 Years..
Conditions Leading to 1907 Contract.
68
87
Conflicting Premises of Negotiations.
27
•
Company, Capital to be Provided by.
44
Company History of Organization of..
67
•
Consulting Engineers' Estimates, of the Financial
Results of Operation....
65
Company-Modification in Dividend Payments of.
Company-Preferential Payment Demanded by..
Company-Preferential Payments to.....
102
36
Consulitng Engineers, Recommendations of.
Consulting Engineers'-Report of....
82
•
79-85
82
Contract a New Franchise...
17
Company-Preferential Payment to Company of
Dividends on Stock..
105
Contract, Capital Requirements of Merged System
During
43
Company-Proviso Enabling City to Purchase
Contract-General Principles and Form of.
34
•
Stock of
114
Contract-Legality of
64
Company, Rate Capital has been Supplied by in the
Past
Contract, Suggestions for a Proper.
18
•
46
Contract of 1907...
15
Company, Rate Company will Supply Capital in
Future
46
Contract of 1907-Advantages Claimed as Inuring
to City from
74
Company's Aims in 1907 Contract..
73
Contract of 1907-Aims of Company in.
73
Company's Definition of "Deficit".
42
Contract of 1907-Appendix B....
119
Company's Demand for a Fixed Dividend-Is It
Justified?
38
Company's Fixed Charges.
•
28, 29
Contract of 1907-Bearing on Present Situation....
Contract of 1907-Concessions Obtained by P. R.
T. Co.
74
75
Company's Obligations
44
•
Contract of 1907-Conditions Leading to.
68
Company's Obligation to Pave Streets..
72
Contract of 1907-Estimated Present Annual Cash
Company's Proposal, Discussion and Analysis of...
33
Value to P. R. T. Co......
75
Company's Proposal, General Discussion of……
34
Contract of 1907-History of..
67
Company's Proposal, Intent of...
15
Control and Management of Proposed Merged Tran-
Company's Proposal of December 20, 1916..
Company's Proposal-Miscellaneous Engineering and
Financial Provisions
13
•
sit System
59
Control and Regulation of Service.
35
112
Control of Service..
8
Company's Reluctance to Accept Contract on 5-
cent Fare Basis and Universal Free Transfers-
Difficulty Underlying
Construction Estimate
94
Construction Estimates-Reasons for Increases in..
96
42
Company's Surplus, Cause of Sudden Increase in....
Company's System-City Virtually Asked to Lease.
Company's Title to Earnings of Merged System, Ex-
tent of
Construction of Certain High Speed Lines Deferred
101
41
36
Construction of City's System (Depreciation Reserve
for .....
117
29
Co-operation Desired by the City
14
Company's Working Capital-Use of to Purchase
Equipment
Co-operation of the P. R. T. Co. Desired.
26
105
Comment on Estimates of Gross Revenue..
64
Cost of Construction-Comparison of Estimates of..
Cost of Construction, Estimates of.
95
25
•
.Comparison of Amount of Investment by City and
Company in the Proposed Rapid Transit System
Cost of Construction (Increase in) and Resulting
Deficits
81
iv
PAGE
PAGE
Cost of Construction of Proposed Rapid Transit
Diagram No. 21 ..
Facing
104
Lines (Estimated)
95
Cost of Equipment
8, 9, 11
Cost of Equipment of City-built Lines-Estimated..
Cost of Equipment-Method of Financing...
Cost of Service per Revenue Passenger-Estimate of
23
Diminishing Profits in Street Railway Business....
Discussion and Analysis of the Company's Proposal..
Dividends (Accumulated) Waiver of...
40
33
115
66
Dividends on Stock, Preferential Payments to Com-
pany of
86
105
D
Darby Line-Use of Market Street Tracks East of
30th Street
Deferring Construction of Certain High-speed Lines
Difficulty Underlying the Company's Reluctance to
Accept the Contract on a Flat 5-cent Fare and
Universal Free Transfers
Difficulties of the Case
Deficit, Company's Definition of..
Deficit to City, Causes of...
Dividend Payments of Company-Modification in.. 102
Depreciation Reserve for Construction of City's Sys-
tem
117
113
101
E
•
Earnings of Merged System-Extent of Company's
Title to
29
42
283
28
Earnings (Surplus) of Philadelphia Rapid Transit
Company
110
42
Effect of a Charge for Transfers
53
16
Deficit to City, Certainty of.
16, 17
Effect Upon the Preferential of the Proposed Auto-
matic Charge for Transfers...
110
•
Deficit to City-Maximum Annual..
90
•
Deficit to City, Methods of Providing for..
Deficit to City, Recommendations to Prevent.
Deficits, Methods of Providing for City's..
Deficits Resulting from Increased Cost of Construc-
tion
80
16
•
Electrification Ordinances (1892 and 1893).
Engineering and Financial Provisions of the Proposal
Equipment Estimates
71
• •
112
96
100
Equipment of City Lines, Ownership of..
Equipment Payment for
50
• •
116
81
Definition of "Deficit," Company's.
42
Equipment-Use of Company's Working Capital to
Purchase
105
Demand for a Fixed Dividend by Company-Is It
Justified?
Estimate A
88, 89
38
Department Estimates-Comparison of, Under Vari-
ous Programs of Construction and Operation..82, 97, 99
Department of City Transit, Expenses of.....
Department of Public Works-Letter from Direc-
tor of
62
Estimate (Annual) for First Fifteen Years.
Estimate A-Financial Results for Fifty Years of
Lease Based on Previous Department Estimates..
Estimate B
88
•
87
90
Estimate Construction
94
53
Diagram-Tentative Progress Chart.
· · •
•
•
Depreciation Reserves and Funds.
Diagrams Illustrating Financial Results as Esti-
mated
Diagram No. 1.
Diagram No. 2..
Diagram No. 3.
Diagram No. 4.
Diagram No. 5..
Diagram No. 6.
Diagram No. 7.
•
•
Diagram No. 8..
Diagram No. 9...
Diagram No. 10.
Diagram No. 11.
Diagram No. 12..
Diagram No. 13.
Diagram No. 14.
Diagram No. 15..
Diagram No. 16.
Diagram No. 17.
Diagram No. 18
Diagram No. 19
Diagram No. 20
•
61
•
97
Estimate of 1913-Transit Commissioners' Report..
Estimate of 1914-Annual Report of Department...
Estimate of 1915-Annual Report of Department..
Estimate of 1917...
98
98
98
•
99
. Facing
Facing 21
26
•
•
Facing 26
•
Facing 31
Facing
30
• •
•
•
•
Facing 7
Estimated Additional Annual Revenue that Might
be Derived from Various Increases in Fare in 1924
Estimated Annual Cash Value to P. R. T. Co. of 1907
Contract
Estimated Balances in Sinking Fund..
104
75
114
•
Facing 37
Facing 40
•
Facing 41
Estimated Capital Requirements of the Merged Sys-
tem During the Period of the Contract….....
Estimated Cost of Construction of Proposed Rapid
Transit Lines
43
95
Facing 41
•
Facing 46
Facing 47
Estimated Cost of Equipment for City-built Lines..
Estimated Cost of Service per Revenue Passenger.
23
66
•
•
Facing 50
Estimated Financial Results-Diagrams Illustrating
Results
97
. Facing
65
Estimated Financial Return to City.
79
•
Facing 75
•
Facing
. Facing
75
75
Estimated Initial Investment of City and Company
in Rapid Transit Development-Comparison of...
Estimates-Comparison of
111
93
•
Facing 75
•
Facing 90
Facing
Facing
88888
•
Estimates (Construction) Reasons for Increases in..
Estimates (Equipment)
96
96
98
98
Estimates of Cost of City-built R. T. Lines, Com-
parisons of
24
V
PAGE
PAGE
Estimates of Cost of Construction
Estimates of Cost of Construction-Comparison...
Estimates of Financial Results ....
Estimates of Financial Results of Operation-Con-
sulting Engineers' .
Estimates of Gross Revenue..
Estimates of Gross Revenue-Comment on.
25
Form of Contract-General Principles of………..
34
95
•
86
Former Franchise Obligations of Company to City..
Franchise Contract-A New
70
17
65
Franchise Obligations of Company to City (Prior to
1907 Contract)
70
65
Franchise Payments and Taxes-Abatement of..
53
•
64
•
Franchise, Term of
54
Estimates-Tabulated Comparison of.
99
Funds and Depreciation Reserves..
61
Exchange Tickets, Abolition of
86
Exchange Ticket Charge
7
Future Bond Issues-Graded Sinking Fund Charges
Upon
.103
Existing Income of Surface Lines Protected as well
as Subway and Elevated Lines....
107
G
Expenses of Department of City Transit.
62
Extension of Present System..
Extensions-Surface
47
General Discussion of Company's Proposal.
115
General Principles and Form of Contract.
ཚཚ
34
Graded Sinking Fund Charges Upon Future Bond
Issues
103
F
Fare
50-85
Gross Revenue and Increase Per Annum-P. R. T.
Co.
90
Fare, Inadequacy of Present.
15
Gross Revenue-Comment On.
64
•
Fare, Increases in-Estimated Additional Revenue
that Might be Derived from Various Increases in
Fare in 1924...
Gross Revenue
Estimates of
65
Guarantee of Dividend-Reason for Caution in..
40
104
Fare-Raising Rate of....
103
Fare Suggested Increase in...
H
80
Financial and Engineering Provisions of the Proposal
Financial Conditions Underlying Transit Develop-
112
ment in Boston
31
Financial Effect of Fixed Dividend on Value of
Underlying Companies
High Speed and Surface Lines-Universal Transfers
Between
History of Organization of Company.
History of P. R. T. Co. and 1907 Contract..
107
67
•
67
39
Financial Results (Annual) to City from First 15
Years' Operation of Unified System....
Financial Results (Annual) to Company from First
15 Years' Operation of Unified System..
Financial Results (Estimated) Diagrams Illustrating
Financial Results-Estimates of...
I
89,93
Inadequacy of Present Fare..
15
.... 89, 92
97
86
•
Income Account of Unified System for 49 Years...
Income Prior to Charging of Preferential-Compari-
son of
91
108
Financial Results for Fifty Years of Lease Based on
Previous Department Estimates-Estimate A....
Financial Results of Operation-Consulting Engi-
neers' Estimates
87
Income Account of Combined City and Company
System (Unified) For 49 Years....
87
Increase in Company's Surplus, Cause of...
41
65
Increase in Fares (Suggested)
80
Financial Results Possible Unler Favorable Condi-
Increase in Service Compared with Increase in
tions
90
Traffic
6
•
Financial Results to City from 49 Years' Operation
of Unified System (Estimate A).
Increase in Taxes (Suggested)
80
88
•
Financial Results to City from 49 Years' Operation
of Unified System (Estimate B)..
91
Increase of Taxes (Abnormal) Resulting from Ab-
normal Increase of Assessments Due to Transit
Development
100
Financial Results to City (Probable).
88
Financial Return to City (Estimated)..
79
Financing Cost of Equipment-Method of..
Five-cent Limits-Omission of..
115
115
Fixed Charges of the Company.
•
28, 29
Fixed Dividend-Is Company's Demand Justified?..
Fixed Dividend-Financial Effect on Value of Under-
38
Increase per Annum of Gross Revenue-P. R. T. Co.
Increased Cost of Construction and Resulting Deficits
Increases in Construction Estimates-Reasons for..
Increases in Fare Estimated Additional Revenue
that Might be Derived from Various Increases
in Fare in 1924...
90
81
96
104
Indeterminate Franchise
55
lying Companies
*39
Fixed Dividend-Reasons for Caution in Guaran-
Information in Regard to Rapid Transit Facilities in
Other Cities-Appendix C...
129
tee of
40
Intent of Company's Proposal.
15
•
vi
PAGE
PAGE
Interborough Rapid Transit Company-Net In-
come of
108
New York Consolidated Railroad Company--Net
Income of .....
109
Investment by City and Company, Compared as a
Consideration in Connection with the Preferential
Charge
New York-Preferential Payments in.
106
New York-Transit Facilities in...
129
111
Nineteenth Street Station………..
11
Issue of City Bonds..
101
Nineteenth Street Station on Market Street Line....
112
L
Lease of Union Traction Company.
68
•
Obligations of Company..
44
Legality of Proposed Contract..
64
Legality of Proposed Contract-City Solicitor's
Obligations (Franchise) of Company to City (Prior
to 1907 Contract)
70
Opinion
135
•
Obligation to Pave Streets (Company's)
72
Legality of P. R. T. Co. Proposal...
7
Omission of 5-cent Limits..
115
Legislation Through-routing Bill
145
Lessee, Ownership of Equipment of City's Lines Sup-
Operation-City's Position with Regard to………..
Operation-Consulting Engineers' Estimate of Fi-
26
plied by
50
nancial Results of
65
Letter of Transmittal...
1
Limitations of Company and City.
30
Opinion of City Solicitor on Legality of Proposed
Contract
135
Limits of 5-cent Fare Omission of..
115
Ordinance of July 7, 1857.
70
Lines Outside of City Limits...
M
10
Organization of Company-History of.
67
•
Ownership of Equipment of City's Lines.
159
50
Maintenance and New Construction Obligations....
Management and Control of Proposed Merged Tran-
sit System
40
P
59
Market Street Line at City Hall-Changing Align-
ment of
Passenger (Revenue), Estimated Cost of Service per
Paving Obligations
66
72
113
Payment for Equipment
116
Maximum Annual Deficits to City....
Method of Financing Cost of Equipment.
90
Philadelphia-Preferential Payments in...
106
115
Methods of Providing for City's Deficits.
100
Philadelphia Rapid Transit Company-A Brief His-
tory of
67
Methods of Providing for Deficit to City.
80
Merged System, Capital Requirements of, During
Period of the Contract.....
Philadelphia Rapid Transit Company Concessions
Obtained by in 1907 Contract....
75
43
Merged Transit System-Control and Management of
Miscellaneous Engineering and Financial Provisions
59
Philadelphia Rapid Transit Company, Co-operation
of Desired
26
of the Proposal.......
112
Philadelphia Rapid Transit Company-Gross Reve-
nue and Increase per Annum.
90
Miscellaneous Recommendations of Consulting Engi-
neers
82
Philadelphia Rapid Transit Company-Lease of
Union Traction Company
68
Modification in Dividend Payments of Company...
102
N
Necessity for Reform of Company's Financial Organi-
zation
19
Negotiations, Conflicting Premises of....
27
Negotiations-Report of Special Committee on, to
Board of Directors of P. R. T. Co., December 20,
1916
Philadelphia Rapid Transit Company Rentals Paid to
its Principal Subsidiaries Under Leases.
Philadelphia Rapid Transit Company Report of Spe-
cial Committee on Rapid Transit Negotiations to
Board of Directors, December 20, 1916....
Philadelphia Rapid Transit Company Stock, What
Does City Secure by Purchase of at Expiration of
Lease?
76
141
141
Net Income of Interborough Rapid Transit Company 108
Net Income of New York Consolidated Railroad
Company
Philadelphia Rapid Transit Company Proposal.....
Philadelphia Rapid Transit Company-Surplus Earn-
ings of
57
85
110
109
Possible Financial Results Under Favorable Condi-
tions
90
New Construction and Maintenance Obligations.
New Factors Resulting from City's Program.
New Surface Lines Within the City Limits..
•
40
• •
29
48
Preferential Charge-Comparison of Amount of In-
vestment by City and Company as a Considera-
tion in Connection with…...
111
vii
PAGE
PAGE
Preferential-Comparison of Income Prior to Charg-
ing of
Rental ..
85
108
Preferential-Effect Upon, of the Proposed Automatic
Charge for Transfers
110
Rentals Paid by Philadelphia Rapid Transit Com-
pany to its Principal Subsidiaries Under Leases...
Report
76
3
Preferential Payment
14
Preferential Payment Demanded by Company.
36
Preferential Payment to Company...
82
Preferential Payment to Company of Dividends on
Stock
105
•
Report of Consulting Engineers.
Report of Special Committee on Rapid Transit
Negotiations made to the Board of Directors of
the Philadelphia Rapid Transit Company, Decem-
ber 20, 1916
79-85
•
141
Present Estimated Annual Cash Value to Philadel-
phia Rapid Transit Company of 1907 Contract...
Present Fare, Inadequacy of...
75
Report of Transit Commissioner-Estimate of 1913
Report, Scope of
98
33
15
Reserves (Depreciation) and Funds.
61
Present System-Extension of……..
Personal Property Tax....
47
100
Reserve (Depreciation) for Construction of City's
System
117
Principal Objections to the Company's Proposal....
Probable Financial Results to City.....
Programs of Construction and Operation-Compari-
son of the Financial Results of the Departments'
Various Programs
5
Results (Financial), Estimates of..
86
888
Results (Financial) Possible Under Favorable Con-
ditions
90
..82, 97, 99
Results (Financial) to City from 49 Years' Operation
of Unified System
91
Proposal of Philadelphia Rapid Transit Company.
Proposed Contract-City's Solicitor's Opinion on
Legality of .
85
Results (Financial) to City-Probable.
88
•
135
Proposed Contract-Legality of
64
Proposed Merged Transit System-Control and
Results to City from Operation of Sinking Funds…..
Revenue (Annual) that Might be Derived from
Various Increases in Fare in 1924 (Estimated)....
Revenue (Gross) and Increase per Annum-Phila-
58
104
Management of
59
Proposed Rapid Transit Lines-Estimated Cost of
Construction
delphia Rapid Transit Company.
Right to Recapture..
90
8, 56
95
Proposed Nineteenth Street Station on the Market
S
Street Subway Line
112
•
Protection of Existing Income of Surface Lines as
well as Subway and Elevated Lines.....
Scope of Report..
33
107
Security
62
Proviso Enabling City to Purchase Company's Stock
Purchase of Equipment-Use of Company's Working
Capital for
114
Service, Adequacy of....
41
Service Control and Regulation of.
35
105
Purchase of Philadelphia Rapid Transit Company's
Stock at Expiration of Lease, What Does City
Secure?
Service Estimated Cost per Revenue Passenger..
Service Specifications.
66
60
Sinking Fund and Amortization of Capital..
49
57
Sinking Fund Charges (Graded) Upon Future Bond
Issues
103
R
Sinking Fund-Estimated Balances in.
114
Raising Rate of Fare...
103
...
Rapid Transit Facilities in Other Cities-Information
in Regard to....
•
Sinking Funds, Results to City from Operation of...
Specifications-Service
58
60
129
Status of City's Undertaking.
21
•
Rate at which Company has supplied Capital in
Past
46
Rate of Fare-Raising.
103
• •
Street Railway Business-Diminishing Profits in....
Subsidiary Companies-Amount per Share Paid in
Capital Stock
40
76
Reasons for Caution in Guarantee of Dividend..
Reasons for Increases in Construction Estimates..
40
96
Subsidiary Companies-Per cent. on Paid in Portion
of Capital Stock...
76
Recapture, Right to.
8, 56
Recommendations
17
Recommendations of Consulting Engineers..
82
Recommendations, with Summary of Transit Situa-
tion
13
Regulation and Control of Service.
35
Subsidiary Companies-Rentals Paid to by the Phila-
delphia Rapid Transit Company, Under Leases...
Subsidiary Companies-Total Capital Stock Paid in
Suggested Increase of Fares..
Suggested Increase in Taxes.
Suggestions for a Proper Contract.
76
76
80
80
• •
18
•
Reluctance of Company to Accept Contract on 5-
cent Fare Basis with Universal Free Transfers-
Difficulty Underlying ...
42
Summary of Consulting Engineers' Report..
Summary of the Transit Situation with Recommen-
dations
79
13
viii
PAGE
PAGE
Surface and High Speed Lines-Universal Transfers
Between
107
Surface Extensions
•
10, 115
Surface Lines Within the City Limits (New)
48
Surplus Earnings of Philadelphia Rapid Transit
Company
5, 110
Unified System-Annual Financial Results to City
from First 15 Years' Operation....
Unified System-Annual Financial Results to Com-
pany from First 15 Years' Operation..
Unified System-Financial Results to City from 49
Years' Operation
89, 93
89, 92
88-91
T
Unified System-Income Account for 49 Years.
Union Traction Company
91
• •
8
Tabulated Comparison of Estimates.
99
Tax on Personal Property.
100
•
Taxes-Abnormal Increase of, Resulting from Ab-
normal Increase of Assessments Due to Transit
Development
Union Traction Company-Assessment of Stock of..
Union Traction Company Financial Effect of Fixed
Dividends on
9
39
100
Union Traction Company-Lease of by Philadelphia
Rapid Transit Company..
68
Taxes and Franchise Payments-Abatement of.....
Taxes-City
53
Universal Transfer System Between Surface and
100
High-speed Lines
107
Taxes-Suggested Increase in.
►
Term of Franchise...
Title to Equipment of City's Lines...
282
80
54
Use of Company's Working Capital for Purchase of
Equipment
105
50
Transfers, Additional Revenue Necessary to be Ob-
Use of Market Street Tracks East of 30th Street by
Darby Line
113
tained by Charge for..
Transfers, Charge for
888888
53
Transfers Proposed Automatic Charge for Effect
W
on Preferential
110
Transit Commissioners Report-Estimate of 1913...
Through Routing Bill..
98
145
Waiver of Accumulated Dividends..
What are the Company's Obligations?.
86
44
U
Underlying Companies-Financial Effect of Fixed
Dividend on
What Does the City Secure if and When it Purchases
the Philadelphia Rapid Transit Company's Stock
at Expiration of Lease?....
57
39
•
What Rate will Company Supply Capital in Future?
46
ix
CHESTNUT HILL
GLENSIDE
JENKINTOWN
O GONTZ
L
CITY
LINE
OAK LANE
GERMANTOWN
ROXBOROUGH
MANAYUNK
SCHUYLKILL
CITY
LINE.
BALA
OVERBROOK
PARKSIDE
AVE.
69TH ST
DARBY
CITY
INE
BELMONT AVE
RIVER
LANCASTER
AVE.
ST.
MARKET
WOODLAND AVE.
BUSTLETON
FOX CHASE
OLNEY
FRANKFORD
GERMANTOWN
ILOGAN
FALLS
OF
SCHUYLKILL
PASSYUNK AVE.
NORTH BROAD ST.
RIDGE
AVE.
AVE.
AVE.
KENSINGTON
NEW MARKET ST
FRONT ST
FRANK
ORD
CALLOWHILL ST.
LAUREL ST
RIVER
PETTY'S ISLAND
CAMDEN
SNYDER AVE.
BROAD ST.
BAN SA PRED
JUNIPER ST.
9th ST.
PASSYUNK AVE`
FRONT ST.
SOUTH ST
BAINBRIDGE ST. W
DELAWARE
DELAWAREAVE.
VINE ST
SOUTH
CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
MAP SHOWING SUBWAY AND ELEVATED SYSTEM
COVERED BY
RAPID TRANSIT FRANCHISES OF 1901
LEGEND
TWO TRACK SUBWAY
ROUTE
MILEAGE
TWO TRACK ELEVATED
CAPITALIZATION
NAME
DESCRIPTION
LINE TRACK
"
FRANKFORD AVENUE
PASSYUNK AVENUE
LEAGUE ISLAND
TOTAL ELEVATED AND SUBWAY
NOTE:- All of elevated system as listed above by lines merged with Market Street Subway ang
Capitalization raised from $ 1,500,000 to $ 5,800,000
**
MARKET STREET SYSTEM Two Track Elevated
GERMANTOWN AVE,
RIDGE AVENUE
15
30
$ 1,500,000
-
9
18
800,000
8.5
17
850,000
The
7.5
15
$ 750,000
3.5
$ 350.000
TOTAL ELEVATED
43.5
87
$ 4,350,000
BROAD STREET SUBWAY Two Track Subway
12.5
25
$ 1,250,000
56
112
§ 5,600,000
MARCH 1917
FRONTISPIECE
Department of City Transit
HON. THOMAS B. SMITH,
City of Philadelphia
Mayor of Philadelphia,
Philadelphia, Pa.
DEAR SIR:-When your Honor directed me to analyze the draft of a contract pro-
posed by the Philadelphia Rapid Transit Company, I suggested to you the advisability
of studying the instrument from four independent viewpoints in order to judge its
merits, and, as far as possible, of obtaining the assistance of public-spirited citizens
and experts in such analysis.
These viewpoints, which have been followed in the report submitted herewith,
were as follows:
1. Public policy, necessity and convenience;
2. Legal;
3. Construction and engineering;
4. Financing or feasibility.
This report bears testimony to your full and prompt acceptance of the suggested
plan, your approval of the employment of the firm of Ford, Bacon & Davis, of New
York City, as experts in the analysis of such a contract, your energy and zeal in
obtaining the necessary appropriation to enable the City Controller to audit the books
of the Philadelphia Rapid Transit Company, and also your approval of the plan to
secure the legislation needed to enable the City to work out its problem properly with-
out accepting ruinous terms, as dictated by the company.
The analysis herewith submitted embodies as Appendix "A" the report made by
Messrs. Ford, Bacon & Davis, which deals with the engineering and financial features
of the company's proposal only. A full discussion of the theory and reasons underly-
ing the protecting or preferential payment desired by the company is given and its
application in New York City is analyzed, but no method is suggested as to how it may
be applied to Philadelphia conditions-that being left for determination by the City's
officials. A short report from the City Solicitor on the legal phases and a copy of the
1
through-routing bill now before the Legislature are included, together with some data
as to recent transit development in New York and Chicago. The report of the audit
of Lybrand Ross Brothers & Montgomery, Certified Public Accountants, has not been
received from the Controller.
This report contains recommendations looking to a solution of the difficulties now
facing the City by a method which should bring fruitful results in the shortest time
possible.
March 29, 1917.
Respectfully submitted,
Hilliam S. Sevining
Director.
2
REPORT
On January 24, 1917, the Philadelphia Rapid Transit Company submitted the
Second Draft of an Ordinance covering a proposal of the company to execute a Contract
and Lease of the City's system of transit facilities "If, As and When Constructed."
That draft is the subject of this report.
The Department's study of the company's proposal shows it to be wrong in principle,
unfair and costly to the City, and very faulty in detail. Shorn of complex technicalities,
the proposal aims not to lease the City's property to the company, but to lease the company's
property to the City at a fixed rental of $1,500,000 per year, the company remaining in charge
of operation without a proper degree of responsibility. This rental, carrying with it an
insurance of all the underlying rentals and obligations of the Philadelphia street railway
system, is protected by the reversion to the company's treasury of about $800,000 per year
now paid to the City, and is positively guaranteed by an automatic charge for transfers.
Thus, for fifty years the company would be relieved of all the risks inherent in the street
railway business; the City would be called on to supply the greater part of the fresh capital
needed to keep up with the growth of population; and the City would be saddled with the
risks of the business, insofar as return on its own investment is concerned.
The company, being a monopoly, is under obligation to provide adequate local
transportation service. Thus it faces, on the one hand, the future demand for con-
struction funds under the risks usual to the business, or, on the other hand, competi-
tion. In the face of these alternatives it must expect to make concessions, and this is
the co-operation to which the City is entitled.
There is nothing to prevent the City from leasing its lines to an independent op-
erator, in which case the financial returns to the City would be greater than the City
can expect to obtain by any arrangement with the Philadelphia Rapid Transit Com-
pany. The City is aiming, however, to obtain the best possible transportation service
for its citizens, and as combined operation of high-speed and surface lines is neces-
sary to that end, the City on its part can afford to make concessions.
The principal concession purported to be made by the company is that it is accept-
ing a fixed rental of $1,500,000 per year, whereas in the current fiscal year its earn-
ings are estimated to be over $2,500,000. The City should not treat this as a conces-
sion until it has confirmed the company's statement of earnings by accepted standards
of service and maintenance. Moreover, caution should be exercised in basing a rental
on results of this year of unexampled activity in all lines of business.
In the proposal the City's interests are subordinated to the company's interests in
every particular. Although the City would be supplying 78 per cent. of the capital re-
quired for the development, extraordinary protection and preference are demanded
for that part supplied by the company. Although the City is asked to hold the company
3
harmless from every contingency of the future, the City is given no direct and effec-
tive control of the management or service.
The preferential payment asked by the company is based in the main upon an en-
tirely different principle from that of the New York preferentials. The proposed
Philadelphia preferential is mainly for the purpose of protecting the company against
loss in net income. The New York preferentials were devised to make the pooling of
revenue practicable and to establish the company's credit so that about 50 per cent. of
the new capital could be obtained through the companies. The companies are pro-
tected in very little degree against loss by reason of traffic diverted, although the bulk
of the loss will fall on the contracting parties through subsidiaries.
The estimates of financial results of operation made by the Consulting Engineers
show that there will be deficits of from $4,000,000 to $5,000,000 per year to the City
in the earlier years of the contract. While the City will be groaning under this load
the company will be carrying no part of it, its income being securely protected what-
ever the contingency. It will be quite as hard for the City to carry this deficit by ad-
ditional taxes as it would be for the company to carry part of it by foregoing a portion
of its dividends. Although the company's credit would be strengthened by the pro-
posed contract almost to the degree of guaranty by the City, the company asks such
latitude in securing new capital that the fixed charges, which are deducted before the
City's share, might be made far greater than the money market may warrant. The
City might suffer to the extent of $30,000,000 from this cause during the term of the
contract.
It goes without saying that an instrument of this character covering a period of
fifty years, affecting the comfort and welfare of every citizen, involving the expendi-
ture of over $200,000,000 and the collection and disbursement of over $2,000,000,000,
should be drawn in unmistakable terms safely guarding the interests of both parties.
The form of the proposal submitted contains many important clauses which leave the
City open to large losses, or which are uncertain of interpretation.
4
PRINCIPAL OBJECTIONS TO THE COMPANY'S PROPOSAL
1. The Company seeks to avoid all the risks incident to the street railway business and
to make the City bear the full brunt of such risks in so far as expected return on the City's
capital investment is concerned.
The proposal is drawn wholly for the protection of the past and future financing
of the company. The City's financial interest is ignored to a large extent, and made to
appear wholly contingent and insignificant as compared with the company's. Under
its terms, the City would assume 100 per cent. of the risk and burden of future expan-
sion of the system, which is manifestly unfair. The real effect of this plan will be to
guarantee not only the company's dividend of $1,500,000 per year, but the company's
management, wages of employees, all interest charges and sinking funds on borrowed
money, past or future, and most important of all to again confirm the excessive rentals
paid to underlying companies that hold the original franchises, either direct or lease-
hold. For to guarantee the dividend must, of necessity, guarantee everything affecting
the earnings from which it is paid.
The City is opposed to any proposition to pay the Philadelphia Rapid Transit Com-
pany a fixed and cumulative guaranteed dividend without some recognition by the com-
pany of its obligations to the City for financing the future capital requirements of the
system. The City's capital is as good as the company's, and should be so treated in the
application of the net earnings.
The greatest objection is in the guarantee itself, not in the amount. The City
may pay the operator whatever fee for services is considered fair and proper, and this
can be paid in a legal manner without guaranteeing the company's pyramid of fixed
charges.
2. The amount of the dividend or guarantee is based on earnings which are not well
established.
The surplus income of the company corresponding to the amount of the proposed ·
guarantee has been as follows, according to the reports of the company:
SURPLUS EARNINGS OF PHILADELPHIA RAPID TRANSIT COMPANY
Years Ending June 30
Amount
1903__
$405,889
1904
220,849
1905__
108,210
1906__
303,997
1907__
364,048 (Deficit)
1908___
1909
1910_
1911_
1912
92,049 (Deficit)
220,534 (Deficit)
-1,329,723 (Deficit)
415,560 (Deficit)
150,490 (Deficit)
1913_
509,583
1914_
310,236
1915
221,705
1916__.
1,672,704
5
From this statement it will be seen that the income varies greatly, and that now
the company is on a high wave of prosperity, whereas two years ago it was barely
able to meet its obligations.
In considering these figures, it must be borne in mind that surplus income is
vitally dependent upon standards of maintenance and service. Maintenance com-
prises ordinary repairs and periodical replacements. On a large part of a street rail-
way property replacements are not made uniformly from year to year and it is neces-
sary to set aside out of earnings sufficient funds to make such replacements, these
funds representing the accrued depreciation. On account of much uncertainty as to
the life of street railway apparatus, the amount of the necessary annual charges to de-
preciation reserve funds is largely a matter of estimate. Much consideration and in-
vestigation has been given to this subject, however, by commissions and operating
officials, so that an approximate standard may be obtained from the practice of other
companies. On the Brooklyn surface lines, which are comparable with the Philadel
phia system, the average maintenance and depreciation charge for the past five years
has been 18.2 per cent. of the gross revenue; on the Boston Elevated Railway 17 per
cent., and on the Chicago railways 16 per cent. The Philadelphia Rapid Transit
Company sets aside only 15 per cent. for this purpose, and this includes the payment
to the City for maintenance of paving between curbs. Deducting this amount, makes
the Philadelphia allowance about 13.5 per cent. on the same basis as those for Brook-
lyn, Boston and Chicago. If the same allowance were made by the Philadelphia
Rapid Transit Company as in these other cities the net income would be reduced by
from $750,000 to $1,000,000.
The acceptability of standards of service is a question that requires careful in-
vestigation. The expenses of operation, and, therefore, the net income, vary naturally
with the car mileage and number of cars operated; therefore, if the service be deficient
in any particular, the net income as reported will be higher than it should be. The
following comparison of earnings and car mileage operated bears upon this question:
INCREASE IN SERVICE COMPARED WITH INCREASE IN TRAFFIC
1912____
1913__
1914__
1915____
1916___
Years
Gross
Earnings
Per Cent.
Increase
Over 1912
Passenger
Car Miles
Operated
Per Cent. Increase
Over 1912
$22,700,692
82,868,950
23,927,179
5.40%
82,941,432
0.09%
24,255,813
6.85%
82,911,808
0.05%
23,843,606
5.03%
79,598,337
3.95% (Decrease)
25,839,344
13.83%
80,184,402
-3.24% (Decrease)
This shows that while the street railway travel in Philadelphia has increased by
about 14 per cent. since 1912, the company has cut the service by over 3 per cent.
The surplus income upon which the company bases its claim for guaranteed divi-
dends includes approximately $900,000 per year from exchange tickets. The Depart-
6
CENTS PER DOLLAR OF PASSENGER REVENUE.
$1.00
$1.00
95¢
95¢
90¢
STOTESBURY MANAGEMENT.
U.T. CO.
P. R. T. CO.
90¢
854
85¢
80¢
80¢
75¢
70¢
65¢
60%
1907 CONTRACT.
75¢
70¢
65¢
60%
55¢
INTEREST
50¢
45¢
40¢
35¢
AND RENTAL
ALS ONLY
FIXED
as To PHILA
RAPID
CHARGES
55¢
RANSIT
50¢ ų
CO. NOT INCLUDED).
45¢
40¢
30¢
25¢
2041
15¢
35¢
30¢
25
200
15¢
PER DOLLAR OF PASSENGER REVENUE
OF
10¢
CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
DIAGRAM SHOWING FIXED CHARGES
CENTS PER DOLLAR OF PASSENGER REVENUE.
10¢
3¢
PHILADELPHIA RAPID TRANSIT COMPANY'S SYSTEM
1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911
FISCAL YEARS.
FROM 1896
1912 1913 1914 1915 1916 1917 1918 1919 1920
917
MARCH 1917.
DIAGRAM NO. 5
ment has always maintained that the right of the company to continue this charge is
questionable.
3. One of the chief difficulties confronting the City in dealing with the Company is the
comparatively high fixed charges of the Company. The Company offers no plan for the
amelioration of this condition but proposes to fix it on the City and traveling public for fifty
years longer.
The company proposes a conservation plan for itself, not a constructive plan for
the City. It does not, in any way, tend to readjust the present transit situation and
simplify or remedy the financial mistakes of the past generation, but rather to add
another virtual lease to an already complicated system of leases and mergers, thus ag-
gravating what is already a bad situation and continuing past financial errors for
fifty years more. These errors originated in the methods used to bring all the original
fifty or more separate companies under one management and control by successive
leases, each lessee agreeing to pay larger rentals until the amount now aggregates
$7,300,000 annually, or over 28 per cent. of the gross revenue.
4. Although the City is expected to provide the larger part of the money needed for the
plan, the Company does not guarantee or even hold out bright prospects of a 5-cent fare
with universal free transfers, which the citizens were led to expect when they embarked
upon this comprehensive plan of city expansion and transit development.
The draft proposes that if, at any time, the semi-annual statement as filed by the
lessee, shows that the net earnings of the system for the six months' period have not
been sufficient to meet all the various preferred claims of the company, the company
shall, "without any order of the Public Service Commission" and without the consent
of Councils or any other municipal authority, make a charge for transfers sufficient
to produce the necessary net earnings. The report of the Consulting Engineers shows
that probably such a charge for transfers will be necessary.
5. The proposed amendment to the 1907 Contract would constitute an admission by the
City that the Company has a legal right to continue to collect the exchange ticket revenue.
The company has never legally established its right to make this charge, and this
Department has steadily refused to admit that the company possesses such right.
Until it is proven, the Department is still opposed to compensating the company for
abolishing exchange tickets by surrendering $665,000 and upwards annually, which is
the only direct revenue now received for franchises which have been capitalized at
many millions of dollars. The amount of the proposed abatements would pay the in-
terest and sinking fund on over $13,000,000 of the bonds that will have to be issued
by the City for transit development.
6. Although prepared by learned and experienced attorneys, it is of questionable legality.
*
The City Solicitor believes it to be legal, but other counsel have advised me that,
in their opinion, the proposed plan violates the Constitution of the State, and that the
7
former decisions in regard to the 1907 contract do not apply to this contract. Only
an appeal to the Supreme Court can finally settle this point.
7. The Company gives no bond or security for faithful performance of the Contract.
8. It eliminates the main subsidiary of the Company-The Union Traction Company-
as a party to the contract and lease.
This condition has heretofore béen deemed absolutely necessary.
9. The City is not given the right of recapture of its own lines.
The right of recapture, provided under Article 18, Paragraph 6, does not give the
City the right to recapture its own lines at any time if the lease proves unsatisfactory,
without buying the entire stock of the Philadelphia Rapid Transit Company, as pro-
vided in the 1907 contract, and as the title to equipment of the City's lines remains
with the Philadelphia Rapid Transit Company it is evidently intended that the City
shall not recapture its own lines independently.
10. The provision that the City shall have the right to purchase all the capital stock of
the lessee at any time during the term of the contract is of doubtful avail to the City.
The purchase of the capital stock of the company, now $30,000,000 in amount,
would require the City to raise, in addition to the sinking fund provided for this pur-
pose, an amount varying from $29,350,000 at present, to $3,750,000 at the expiration
of the contract. The City's borrowing capacity promises to be fully utilized for many
years, so that the City's ability to raise the money to purchase the stock of the com-
pany is doubtful, except during the later years of the contract.
This clause in the company's proposal appears under the terms of the lease. It
should be incorporated in the section covering amendments to the 1907 contract.
These clauses are so worded that the City might conceivably be required, at the
time of purchase, to pay the company the amount of the unpaid accumulated divi-
dends on its stock prior to June 30, 1916, amounting to about $15,000,000.
11. Satisfactory control of service is not provided.
This is one of the most important and vital sections of a lease, and the paragraphs
referring to it are very loosely drawn. Although the lease provides for a unified sys-
tem, practically all references to control apply either directly or indirectly to the
high-speed lines or system only.
12. The terms regarding the title, payments for and financing of cost of equipment are
such that at the expiration of the contract the City will virtually have paid twice for that
part of the equipment amortized at that time.
A discussion of this feature of the proposal in detail appears later in this report
and also in the report of the Consulting Engineers.
8
13. The proposed method of financing the equipment might be very disadvantageous to
the City.
The proposal specifies that the funds for equipment shall be provided by first
mortgage gold sinking fund bonds, bearing interest at not to exceed 6 per centum. In
the provision for distribution of net earnings the interest on these bonds is placed
before all other fixed charges. This interest, estimated to amount to from $1,003,000
at the beginning of full operation, to $3,198,000 at the end of the contract, therefore,
is a first charge against net earnings over eight times as great.
It would be further protected by the proposed automatic charge for transfers.
Protected in this manner, it would seem as if the equipment funds should be secured
at less than 6 per cent., except under extraordinary conditions of the money market.
The cost of equipment at the beginning of operation is estimated at $20,077,000, but be-
fore the end of the contract an additional investment of $35,048,000 will be required
to keep pace with the growth of traffic from year to year. Under the company's pro-
posal these bonds could be sold on a 6 per cent. basis whatever the state of the money
market, and the City would have no recourse or power of restraint. A difference of 1
per cent. on cost of equipment would reduce the net revenue payable to the City by
from $200,000 per year in the early years of the contract, to $533,000 at the expiration.
It is provided that the bond and the mortgage and deed of trust shall contain such
other provisions and be in such form as the lessee may determine. The same right
should be afforded the City, as at the expiration of the contract there will be a large
amount of unamortized bonds.
14. The Company should not be allowed to obtain new capital by assessment on the
stock of the Union Traction Company on a 6 per cent. basis without the City's approval at
the time such capital is raised.
The company's fixed charges are so protected by priority and by the automatic
charge for transfers that it should be able to obtain new capital on a basis lower than
6 per cent., except under extraordinary conditions. The City, therefore, should have
the right, at the time when new capital is needed, to approve or disapprove of this
method of raising it. Any saving in interest on new capital provided by the company
will be of direct benefit to the City on account of its proposed position as residuary
payee of the net earnings.
15. No provision for amortization of new investment by the Company in surface lines
or extensions has been incorporated in this draft. Definite provision should be made for
amortization of new capital invested in the company's system.
As 90 per cent. of the sinking fund charges would in effect come out of the City's
net revenue, this sinking fund should, in some manner, be held for the benefit of the
City so that it would not be lost to the City in case the option to purchase the capital
stock of the company at the expiration of the contract is not exercised.
9
16. Procedure Proposed for Surface Extensions.
The proposal embodies an impracticable plan for the construction of surface ex-
tensions by the City. The use of City funds for this purpose might be desirable in or-
der to effect a saving in capital charges and thus lighten the draft upon the City's share
of the earnings of the unified system.
This clause is so worded that it would be practically impossible to build surface
extensions with City funds.
The clause in question, properly modified, should be co-ordinated with a clause
relating to surface extensions, embodied in amendments to the 1907 contract. The
latter provides that the City may require the company to build surface extensions which
the Public Service Commission shall determine to be reasonably remunerative to the
lessee. The distribution of net income of the unified system is such that surface ex-
tensions could not be at all remunerative to the company. Interpreted literally, this
clause might bar the construction of extensions by the company, and thus no exten-
sions could be built by either City or company.
17. Charges necessary for the City's depreciation reserve should come before the Com-
pany's 10 per cent. deduction from net income.
The proposal provides that a depreciation reserve for the City's construction shall
be deducted only when the necessary charges thereto are greater than the City's sink-
ing fund charges. This practically eliminates such a reserve, and the only compensa-
tion to the City for the loss in value of its property by reason of use and operation is
through its sinking fund charges, which are payable after all the company's deduc-
tions, including its 10 per cent. of net income. The company would thus be making
a profit of 10 per cent. on that part of the operating cost due to using up of the City's
property. This would amount to over $4,000,000 during the term of the contract, with-
out taking into account the compound interest thereon which the City obtains in its
sinking funds.
18. The depreciation reserve fund for the lessee's system passes to the lessee at the ex-
piration of the contract and the charges to it, therefore, should not be left for determina-
tion by the Director and Company alone.
During the late years of the contract a venal or careless director might agree to
excessive deductions for the company's reserve funds, and 90 per cent. of the money
so set aside would be a direct loss to the City, if the City should not find it advisable
to purchase the capital stock of the company at the expiration of the contract.
19. Proper consideration is not given to lines outside the City limits.
A considerable part of the company's system lies outside the City limits, and it
is conceivable that it will be to the advantage of all parties concerned for the com-
pany to make additions and extensions outside the City limits in order to give proper
service to the territory occupied, and to serve as feeders to the City-built high-speed
10
lines. There should be specific provisions in the contract to cover the construction and
operation outside of the City limits.
In the paragraph of the proposal relating to fare, it is specified "the fare for a
continuous ride betwen termini of each route of the unified system shall be 5 cents.
* *
99
This clause should be corrected to confine its application to the 5-cent
limits. Otherwise a passenger for 5 cents could ride to the terminus of any of the
outlying lines which enter the City limits. This would reduce the gross revenue by
at least $500,000, and under the terms of the proposal the City's net income would
suffer.
20. The entire burden of new forms of taxation in the future should not be saddled on
the City to the immunity of the Company.
The proposal provides that all taxes of every nature whatever levied on the lessee,
or any of the companies underlying it, must be paid out of the gross revenue of the uni-
fied system and thus come before the City's share in the net income. If the Federal or
State governments should, at any time, find it necessary to levy extraordinary taxes
on public utility corporations, the amount of such taxes under the terms of the pro-
posal would in effect be paid by the City and not by the company.
It is not improbable that the government might find it necessary to impose taxes
which would be in the nature of conscription. In such a case the company would be
immune, and the City would have to bear the taxes aimed at the company.
21. The proposed Nineteenth Street Station on the Market Street subway-elevated line
is inadvisable.
This station would impose additional fixed charges and operating expenses of
from $40,000 to $50,000 per year. By the terms of the proposal 90 per cent. of this extra
cost would fall upon the City at a time when it will be confronted with a large burden
of deficits on account of the construction program upon which it has entered. The pro-
posed station will be of comparatively slight benefit to traffic, and its introduction into
the only express run on the Market Street line will be a great disadvantage to the
West Philadelphia traffic.
22. The proposal in favor of the proposed equipment bonds would debar the City
from placing any lien on the City's structures.
The company by its proposed method of financing the cost of equipment of
the City's lines debars the City from using its subway and elevated structures, costing
$63,000,000 or more, as security for bonds which it may desire to issue at some future
date, if it be given authority to issue such bonds. (See Article XVI of the proposal.)
23. Minor Defects.
There are many minor points of objection, and the phraseology of the proposal
is faulty in a great number of particulars.
:
11
SUMMARY OF THE TRANSIT SITUATION, WITH
RECOMMENDATIONS
In reviewing the history of the negotiations between the City and the Philadel-
phia Rapid Transit Company it must be evident that if after three years of negotiations
the company and the City are as far apart as ever on the proper terms of an agreement,
something must be fundamentally wrong with the situation.
A study of the facts as set forth in this report should prove conclusively that the trouble-
some elements in the negotiations on the City's side are matters of policy which no one is
delegated to settle but Councils and the people. On the company's side, the difficulty lies in
the huge over-capitalization of the system, and for financial reasons the entire system must
be treated by the City as a unit. The company has, by successive leases, piled up its capitali-
zation until (on a 5 per cent. basis) it is now $225,000,000, or nine times the gross earnings,
and about $350,000 per mile of track.
The City's program for transit development now contemplates investing in the business
$75,000,000 more (including equipment), making the total capitalization of the business over
$300,000,000, or at least twelve times the annual gross earnings.
Even the present load is excessive for any city transportation system to carry, and in-
stead of coming forward with a plan to lighten the burden and thus help the City the com-
pany asks the City to confirm the present load and to pay year in and year out a dividend
in addition. Furthermore, the request that the City give up the payments now due it under
the 1907 contract is outrageous for the reason that this is now the only return which the
company makes to the City for franchises which have been capitalized at many millions of
dollars.
The Company's Proposal of December 20, 1916.
i
The company's latest proposal, which is the subject of this report, purports to be a
lease of the City's system, and was drawn with supreme skill so as to appear to be a lease
of the City's system by the company, but is, in financial effect, actually the lease of the
company's system by the City, with the control and operation left in the company's hands.
The fundamental idea running all through the company's draft is that the City
shall protect the company's system against loss of net income caused by the City's high-
speed lines competing with the company's lines, and diverting business which it regards
as belonging to its lines.
If the system of high-speed lines, which the City has authorized, were built by a
private corporation, the company could not expect to be compensated for business
which the high-speed lines diverted from its system.
Does the fact that the City finances these lines in any way change the situation,
and, if so, to what extent?
*
13
Co-operation Desired by the City.
In what does "co-operation" as the City understands it consist?
By "co-operation" the Department understands that the City's and the company's
systems shall be operated on a basis of friendly competition, so as to afford the maxi-
mum of service to the public at the present fare, and the company shall be responsible
for the results in capital investment in the City's system to a normal, proper and just
degree.
Maximum service to the public must include interchange of passengers between
the systems wherever it is to the advantage of the public.
For the company's "co-operation", which, under this proposal, is hypothetical
or certainly not real or substantial, the company demands the equivalent of a huge
preferential payment, which involves the City's guarantee on both the company's past
and future capital investment, as well as its operating results.
The City need not pay the company for its co-operation.
The question is: SHOULD IT PAY?
It may equip and operate its own lines, and it may, if necessary, force the com-
pany to transfer passengers with the City's lines upon terms fixed by the Public
Service Commission. Such action means aggressive competion or rivalry.
Principle of the Preferential Payment.
There is no established principle warranting the compensation of a street railway
company for diverted business or loss in net income caused by competing lines.
The Boston, New York and Brooklyn contracts are the only ones which have been exe-
cuted where the city has built part of the high-speed system, and in no case has the business
of the surface railways been protected.
In San Francisco, where a city-owned and operated surface line competes with a
private system, there is no protection to the older line.
Surface car lines are of great use in supplying such public transportation as a
city needs during its period of growth from a town into a city of 500,000 and upward.
They are now realized to be but one step in the development of a city's transportation
problem, and must later be supplemented by real rapid transit facilities in order to
relieve congestion and properly develop the outer zones of the city. These new facili-
ties must, to some extent, duplicate the service of the older surface systems.
Surface and high-speed lines operating in the same district and on the same or
adjacent streets must necessarily compete for the passengers of that district, whether
under the same ownership and control or not. If under the same control, such compe-
tition is friendly, but its financial effect is still unfavorable to the surface system. Being
under one ownership, however, it becomes a family affair, and no claim for surface
line losses can be made on the public or an outside competitor. Theoretically, by the
time high-speed lines are necessary, the cost of the surface system should be sufficiently
amortized so that the remainder need not be an obstruction in financing the rapid
14
transit lines, but where franchises are perpetual there has been no incentive to do
this, although the moral obligation still lies.
Under real competition between high-speed and surface systems no preferential
is needed each system takes its chances for profit based on competitive conditions.
Such was the condition in New York when the City opened its first subway line in
1904. No competing line-surface or elevated—was given any preferential or protect-
ing payment as compensation for business diverted to the new subway line of the City.
If the owners of the surface lines in Manhattan, instead of an independent operator,
had obtained the contract for operating the City's line, would they thereby have been
entitled to a claim for losses due to diverted business? The principle is the same no
matter who is the operator. The preferential claim was only later allowed in New
York and Brooklyn in the dual contracts of 1913 as a financial expedient, so that the
city could obtain the large amount of capital which it needed for its program and
which it could only obtain through the companies.
The protective feature for diverted business was only incidental, insignificant and
not the main reason for it, as the contracting companies really bear most of these
losses through subsidiary companies. The main reason for it lay in the size of the
construction program which, like the one adopted in Philadelphia, was recognized as
too extensive to be carried on a 5-cent fare. Hence, each company was given a limited
cumulative preferential, which was not guaranteed, and the city determined to meet
its deficit by taxes rather than increase in fare.
A full discussion of this protecting or preferential payment is given in the report of
the Consulting Engineers.
Inadequacy of the Present Fare.
It must be evident that underlying all this controversy is the bed rock fact that the
authorized and established rate of fare will not meet the demands of the present system, as
now constituted, and carry the City's program as well. The City is not willing to agree to
an increase in the fare for the benefit of the company, because the present fare should be
ample for its needs if the company were not over-capitalized. In any contract which may
be formulated between the City and the company, on the basis of co-operation or friendly
competition, the preferential payment or any similar payment from one system to the other is
only warranted when the 5-cent fare is insufficient to cover the requirements of both sys-
tems, and the company (which has no other source of income) is to be protected. The City,
which has other sources of revenue than the fare, would then assume any shortage of net
income.
Intent of the Company's Proposal.
The 1907 contract aimed to preserve the company's monopoly of the local trans-
portation system. Before that time the company's service was regulated in part by fear
of competition.
The present high-speed line of the company (The Market Street Passenger Rail-
way) might not even now exist had it not been promoted by a competing company,
15
which, perceiving the City's needs, secured the enactment of enabling legislation,
charters and City franchises and threatened severe competition with the Union Trac-
tion Company, which is wholly a surface system.
That system, to protect itself, formed an alliance with the new company and
leased itself to the new company on a basis very favorable to itself.
The new company then secured the 1907 contract to prevent further competition
by private companies, or at least to secure a first option on any new lines proposed
to be built in the City.
Now that the City has authorized a system of lines which will compete with the
company's lines for business, it proposes to do exactly the same with the City that the
Union Traction Company did with the Philadelphia Rapid Transit Company in 1902
—protect itself by alliance with the City upon terms which follow as closely as con-
ditions permit those laid down in the lease of the Union Traction Company to the
Philadelphia Rapid Transit Company.
A comparison of the company's present proposal with that lease is interesting as
showing the same or similar intent-to protect the older system at the expense and to
the detriment of the newer.
The Certainty of a Deficit to the City.
The estimates of the Consulting Engineers show that under the terms of the com-
pany's proposal there will be a deficit to the City from the operation of the unified
system amounting to $4,000,000 or $5,000,000 annually over a long period of years.
The large annual deficit is the result of:
1. The company's present over-capitalization, for which the company is respon-
sible.
2. The rapid injection into the business of new capital at a rate several times the
normal rate, for which the City's program is responsible.
3. The overpayment to the Philadelphia Rapid Transit Company for its so-called
"co-operation."
If the City should decide to equip and operate its own system, either directly or
through an independent operator, with transfers between the City's and the present
system, as ordered by the Public Service Commission:
Item No. 1 would be eliminated.
Item No. 2 would remain approximately as before.
Item No. 3 would be reduced to the cost of management only.
There would still remain an annual deficit, but smaller in amount and not con-
tinuing for so long a period.
The contract cannot ignore this deficit, which must be met by either the company
or the City, or divided between them.
If the company meets it, it must be provided by the earnings of the business.
16
If the City is to meet it, it must be reflected in the taxes where it is automati-
cally placed by the loan ordinance, and the City's adopted program of transit develop-
ment.
The City has it in its power to make this deficit larger or smaller by adjusting its
program of construction. This was pointed out in the report of the Department a year
ago.
The certainty of a large deficit may be regarded as inevitable if the City's program of
construction and fares be carried out as now planned, and this deficit will be larger with
the Philadelphia Rapid Transit Company as the operator of the City's system than with an
independent operator. The advantage of the Philadelphia Rapid Transit Company as op-
erator largely disappears if the fare be increased on the high-speed lines, or if a charge for
transfers be made. The advantage of co-operation with the Philadelphia Rapid Transit
Company in this undertaking is to have a unified system, with a universal 5-cent fare and
free transfers.
Recommendation.
It must be evident from this discussion that only City Councils can decide these
matters which affect the City's program, the taxes, etc.
The City has adopted the routes for a system of high-speed lines and provided the
financing for them. It now must settle the terms and conditions under which they
shall be operated, as required by Section 3 of the 1907 contract.
Before further negotiations with the company are begun, therefore, I recommend
that Councils take such steps as they may deem proper in order to promptly settle
these fundamental issues upon which a successful agreement must rest.
The Contract a New Franchise.
This contract is the most important step in the whole transit situation, for it is
actually a new franchise and fixes for fifty years the relations between the City and
the operator. It must crystallize many now partly formed ideas of each party's rights
and obligations into definite and concrete form.
The theory of a contract or franchise is that it shall be fair, just, equitable and ad-
vantageous to each party to it, with mutual concessions when necessary.
This question of a franchise is one which will require much careful study and I
cannot express my ideas better than by the following quotation from a recent address
by F. W. Doolittle of New York City:
"Franchise writing is not greatly different from the drawing of specifications
and should therefore have devoted to it the best engineering skill. In fact, many
of the past difficulties have arisen from the fact that franchises have displayed
more the handiwork of politicians and lawyers.
"The problem seems to be one in applied economics and one in which the engi-
neering profession is capable of rendering real service to the community. There
must be determined a proper and just balance between costs, service and obligation
of the utility and its patrons with respect to community funds. Future costs
"
2
17
must be so estimated as to give due consideration to changing markets, changing
standards of service, changing volume of business, and the credit of the company as
determined by the length of its franchises and the conditions under which it will
find itself at their expiration. Where changing conditions are likely to make this
too difficult a matter, to take care of indefinite franchise provisions, some method
of adjustment at the hands of able and far-sighted men must be provided.
"The industrial world has found that large advantages are to be obtained by
the adoption of general profit-sharing plans, and it is suggested that whatever
form franchises take, some provision should be made so that able management and
conscientious service may be rewarded. The proportionment in which the various
parties should participate in the savings resulting from efficient management, it is
not easy to determine, but it has been suggested, and with apparent propriety,
that the savings may be divided, say 20 per cent. to the employees of the utilities,
and the balance equally between the municipality and the stockholders of the public
service corporation."
Suggestions for a Proper Contract.
Some of the essential features upon which a fair contract between the City and the
Philadelphia Rapid Transit Company may be based, are outlined here:
1. The company shall, if possible, adopt a program which will ultimately effect
a readjustment of its finances by refunding or other approved means, and the City
shall readjust its program of construction so as to bring the estimated deficit within
reasonable limits as recommended by the report of Ford, Bacon & Davis (Appendix A).
The City shall not guarantee the company's system as to capitalization, man-
agement, or operating results in any way, either directly or indirectly.
2.
3. As the gross and net earnings of both the City's and the company's systems
fluctuate from year to year and depend upon factors beyond the City's control, any
payment to the company for its co-operation should not be based on gross, net, or di-
verted earnings of either system, but should be, if at all, a payment based on the ex-
tent to which the company really co-operates in the City's program, and in deter-
mining its amount the City shall recognize the company's obligation to be responsible
for the result of capital investment in the rapid transit facilities at a normal rate.
4. The payment or fee to the company for acting as manager or operator of the
City's system shall not exceed the amount which would be paid for the same service
under independent operation, and preferably graded and proportional to the relative
gross earnings of the two systems.
5. The City's system shall be operated for the City's benefit. Physically the com-
pany's and the City's systems may be operated as a unit, but financially they must be
kept separate, each system to count as its earnings whatever cash it receives on its lines
-it may be assumed that the transfers will balance each other.
18
6. The City may equip as well as build its own high-speed lines, thus owning
outright its own system complete.
This provision is not a necessity if the company will furnish the equipment
on fair terms, but it will obviate any necessity for the company to make use of the
City's guarantee on its operating results in order to finance the equipment of the
City's lines. It also makes it possible for the City to take over a completely
equipped system if it should decide to recapture its own system at any time.
7. The company's system of surface lines shall be financed by the company and
the company must not be permitted to use the City's credit either directly or indi-
rectly, but must stand on its own feet, and stand or fall as a result of its own manage-
ment and acts.
8. The City must be left free to regulate the company's service under the Public
Service Commission.
9. Change of fare or charge for transfers, etc., to be left to the Public Service
Commission, but no increase is to be for the company's benefit, until the City's capital
is treated as well as the company's.
10. The contract of 1907 to be modified as little as may be necessary to correspond
with conditions of this contract. Payments now due the City thereunder not to be
abated or modified. The company to cancel all claims on unearned and unpaid divi-
dends cumulative since 1907, and change date so that 6 per cent. dividends may be cumu-
lative from date of the contract.
11. The term of the contract shall be fifty years or preferably of indeterminate
length, with provision that the City may recapture either its own system, or both sys-
tems, at any time, after due notice, upon stated terms.
These suggestions aim to prevent the company from placing on either the taxes or the
fare any burden not due directly to the City's program, and to prevent the company using
the City's credit for its private advantage.
Instead of guaranteeing the results of the company's co-operation and participation in
the City's program to an uncertain extent, as the company's plan proposes, this plan pro-
poses no guarantee of any kind to the company. Instead, it places a certain definite and
fixed limit on the burden to be placed on the company by the City, this burden representing
the company's obligation to the City in return for its position as a monopoly.
The present draft as submitted by the company does not fully meet any of these es-
sential features, and in underlying principles which govern and determine the terms and
form of the contract it is radically different.
Necessity for Reform of Company's Financial Organization.
If the company shall fairly co-operate in the City's transit program there should
be no desire to resort to drastic measures in order to immediately correct what is
now generally recognized as bad financing (to use a mild term) on the company's
19
part during the last thirty years. Now that this condition is known to be so dominant
a factor in the transit situation, the City cannot afford to overlook it and allow its
effects to hamper the City for many years to come. So long as it affected the company
only, the City took no official notice of the company's financial legerdemain, but now
that it proposes to transfer the effect to the City's innocent stockholders and the City's
Treasury, the City must take serious account of it. The City desires that the com-
pany's bad financial handicaps shall be gradually eliminated by mild means, so that
surgery will not be necessary, and hopes that the company will make its co-operation
real and not mere words in assisting the City to that end. The City is not actuated by
a spirit of retaliation, or revenge, in its desire to prevent the company from transfer-
ring the effect of its mistakes to the citizens, and has no motive to deprive any legiti-
mate capital of a proper return, but wishes to now inaugurate a plan to gradually
lighten the capital burden on the business, instead of keeping the burden of capital
about constant as has been the past policy. In the face of rising labor and material
market, it is only by such means that the improved service contemplated can be ren-
dered at the present fare.
a
20
LINES.
CALENDAR
YEARS.
City Hall -
SECTION.
BROAD ST. SUBWAY
City Hall Contract 101.
Contract 102.
Broad St-South St. to Stiles St.
Stiles St. to Venango St.
Venango St. to Pike St.
Pike St. to Cayuga St.
Cayuga St. to Olney Av.
North East Branch
1,000,000.
10,378,000. | 10,378,000.
10,206,000. 10,206,000.
2,660,000.
APPROPRIATION
ESTIMATED ADDITIONAL
COST
1915.
1916.
1917.
1918.
1919.
1920.
1921.
1922.
1923.
1924.
FUNDS NEEDED
74,260-
—106,265.
$2,000,000.
2,000,000.
469.475.
1,000,000.
650,000
$400,000
100,000.
500,000
1,000,000 4,500,000
206,000 5,000,000
100,000
EQUIP.
EQUIP
4,500,000 378,000
In Operation July 1, 1920.
5.000.000 EQUIP
2,660,000
330,000
1,330,000 EQUIP
1,596,000.
1,596,000
196,000
700,000
2,657,000 2,657,000.
157,000+
1,250,000
2,884,000, 2,884,000.
84,000+
1,400,000
100,000 EQUIP
1,250,000 EQUIP.
1,400,000
1,400,000 EQUIP
In Operation July 1, 1922.
North West Branch
2,884,000. 2,884,000.
84,000
1,400.000
1,400,000- EQUIP.
South St. to League Isd.
Thompson St. Sewer
160,000.
8,371,000. 8,371,000.
160,000.
371,000
4.000.000
4,000,000 EQUIP.
110.000
50.000
-428,000
DELIVERY LOOP
7,600,000.
8,028,000
428,000.
1,000,000 3,400,000 3,200,000 N In Operation July 1, 1920.
EQUIP
PARKWAY - ROXBOROUGH
Subway -Filbert to 274 Aspen St.
3,682,000.
3,682,000
Elevated-27 Aspen to Henry+Bowman
3,818,000.
3,818,000.
do. Henry & Bowman to Parker Av.
3,378,000. 3,378,000.
182,000 $700,000
1.700,000 1,800,000 EQUIP.
1,500,000 2,318,000
178,000 1,600,000
EQUIP In Operation July 1,1921.
600,000 EQUIP
In Operation July 1,1922.
CHESTNUT ST. SUBWAY
Chestnut St.- 30th to 11th Sts.
11+Chestnut to Front+ Arch Sts.
5,000,000..
5,000,000.
3,905,000. 3,905,000.
1.400 000
1,800,000
1,105,000 ⠀⠀⠀⠀⠀⠀⠀ 1,400, 000
1,400,000
EQUIP.
In Operation |July 1, 1924.–
1.800,000 EQUIP
1.800,000
DARBY ELEVATED
30th Market to 67th Woodland Av.
Woodland Av-67th St. to Cobbs Creek.
FRANKFORD ELEVATED
Arch St. to Callowhill St.
Callowhill St. to UnitySt-Foundations
Unity St. to Dyre St. – do.
4,200,000.
4,200,000.
744,000
200,000-
3,500,000
500,000
744,000
700,000 EQUIP In Operation July 1, 1919.
AUTHORIZED
44,000
161.0007
561,000.
56 1,000.
400,000
160,000.
160,000.
39,175
118,535.
+2,923.
25,200.
25,200.
25,200
Callow hill St. to Dyre St.- Steel.
2,484,800.
2,484,800.
1,328,802.
1.155,365 EQUIP.
In Operation July 1, 1918.
do.
do. Concrete Deck.
50 2,800.
502,800.
502,800 EQUIP.
do.
do.
Station Bldg's
Huntingdon St. Station - Steel
871,000.
871,000
871,000 EQUIP
45,000
45,000.
45,000 EQUIP
Dyre St. to Cottman Ave.
Cottman Ave. to Rhawn St.
2,75 0,200.
2,750,200
829,000. 829,000
250,200
29,000
2,500,000
EQUIP
800,000 EQUIP
BYBERRY LINE
Frankford to Castor Rd. Bustleton Pk.
400,000.
400,000.
200000 20001
July, 1918.
Castor Rd. & Bustleton PK to Byberry.
800,000
800,000.
SEWERS- Central City
SEWER-Thompson St. (from 1 Loan)
440,000.
440,000.
333,135.
78,865.
28,000.
60,000.
60,000.
60,000
REAL ESTATE
2,200,000.
2,200,000.
800,000 1,400,000,
do.
do.
Expenditure from Loan in Year.
Total Expenditure from Loan.
Additional Funds Needed in Year.
Total Expenditure
1,800,000. 1,800,000.
63,600,000.
446,570. 1,995,677.
2,442,247.
27,880,000
+
91,480,000.
KEY
·
Construction Under Contract
Construction - Completed
-
WD Construction Funds Available
Construction No Funds Available
EQUIP Time of Equipment
400,000
1,400,000
1,000,000 400,000
7,667,488. 24,462,000. 18,132,265.
10,109,735. 34,571,735. 52,704,000.
73,000. 2,500,000. 1,274,000.
2,442,247. 10,182,735. 37,144,735. 56,55 1,000.
5,196,000.| 2,100,000. † 1,800,000. | 1,800,000.
57,900,000. | 60,000,000. | 61,800,000. | 63,600,000.
10,478,000. 10,755,000.
10,755,000. | 1,400,000. 1,400,000.
72,225,000. 85,080,000. 88,280,000. 91,480,000.
In Operation July. 1919.-
EQUIP In Operation
800,000 EQUIP
In Operation, July 1, 1919.
CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
DIAGRAM OF
SCHEDULE ASSUMED FOR CONSTRUCTION
AND FINANCE OF THE CITY'S SYSTEM
Preparation of Contract Plans
•
MARCH, 1917
TENTATIVE PROGRESS CHART
STATUS OF THE CITY'S UNDERTAKING
Authorizations and Appropriations.
On March 8, 1915, an ordinance was approved by the Mayor which authorized
an increase in the City's indebtedness by $6,000,000 to be used "towards the sub-
way railway in Broad Street, from League Island to Olney Avenue, with the neces-
sary branch lines northeast and northwest from Broad Street, and the construction of
an elevated railway from Front and Arch Streets to Rhawn Street," to be submitted
to a vote of the people. This was done on April 29, 1915, and was approved by the peo-
ple. Concerning this the former Director of the Department of City Transit says in the
1915 Report of the Department, page 12:
"The Director of the Department, although he strongly disapproved of the
departures from his recommendations as to routes, realized that these departures
were mainly of a temporary nature and that a knowledge of the necessities of oper-
ating and traffic conditions will require necessary changes to be made before it is
too late to make them. Therefore, in order to have the City take such a step as
would unconditionally commit the City to transit development and the prompt
construction of the lines, he recommended under date of March 6th that the Mayor
sign the ordinance as passed. The Mayor thereupon signed the ordinance on March
8th, his action meeting with general public approval.'
""
As a result of the City being thereby committed to a program of transit develop-
ment, an election was held on May 16, 1916, and $57,100,000 additional was authorized
to be borrowed by the City for transit development.
On July 20, 1916, Councils appropriated these funds to the specific routes author-
ized as follows:
66
'SECTION 1. The Select and Common Councils of the City of Philadelphia do
ordain, That the sum of fifty-seven million one hundred thousand (57,100,000) dol-
lars out of the sixty-seven million one hundred thousand (67,100,000) dollar loan,
authorized to be borrowed by ordinance approved June 29, 1916, be, and the same
is hereby appropriated to the Department of City Transit, to be used toward the
construction and improvement of subways, tunnels, railways, elevated railways
and other transit facilities (including the amounts necessary for the payment of
interest and sinking fund charges accruing, and which may accrue thereon
throughout the respective periods of construction, and until the expiration of one
year after the completion of the work for which such indebtedness shall have
been incurred), to the following items:
Item 210 (loan). Toward the construction and improvement of a sub-
way railway in Broad Street, from League Island to Olney Avenue,
with four-track capacity between McFerran and Spruce Streets, with
the necessary branch lines northeast and northwest from Broad
Street, twenty-five million dollars.....
$25,000,000
21
Item 211 (loan). Toward the construction and improvement of an ele-
vated railway from Front and Arch Streets to Rhawn Street, via
Front Street, Kensington Avenue and Frankford Avenue to Rhawn
Street, four million four hundred thousand dollars ..
Item 212 (loan). Toward the construction and improvement of a
double-track surface passenger railway, beginning at or near Frank-
ford Avenue and Oxford Avenue; thence along Oxford Avenue, Cas-
tor road, Bustleton Avenue to Verree road; thence from the inter-
section of Bustleton Avenue and Verree road through private prop-
erty along a proposed extension of Verree road to the intersection of
Byberry road and Worthington road; thence along Worthington
road and Southampton road to the Byberry and Bensalem pike, with
all necessary curves, switches, grading and widening of roads, con-
struction of bridges and purchase of private property in connection
therewith, one million two hundred thousand dollars
Item 213 (loan). Toward the construction and improvement of an
elevated railway, beginning at or near Thirtieth and Market Streets,
or at or near Thirtieth and Chestnut Streets, and extending thence
to Darby, four million two hundred thousand dollars
Item 214 (loan). Toward the construction and improvement of a
subway railway extending beneath the Parkway, from a point of
connection with the Broad Street Subway at or near the City Hall,
into Fairmount Park near Green Street entrance, and an elevated
railway connecting with the same, extending north over Twenty-
ninth Street; thence to Henry Avenue or Street, together with an
extension thereof to Roxborough, which extension may be in whole
or in parts either elevated or open subway, seven million five hun-
dred thousand dollars ...
Item 215 (loan). Toward the construction and improvement of a
subway railway in Arch Street, Eighth Street and Locust Street,
forming a delivery loop and connecting with the Broad Street Sub-
way at or near Arch Street, and at or near Locust Street, seven mil-
lion six hundred thousand dollars....
Item 216 (loan). Toward the construction and improvements of a
subway railway if Councils should hereafter determine that the same
should be erected, as a connection between the elevated railways lead-
ing to Frankford and to Darby, such subway to be mainly under
Chestnut Street, five million dollars....
4,400,000
1,200,000
4,200,000
7,500,000
7,600,000
5,000,000
Item 217 (loan). Toward the acquisition of real estate and real estate
easements in connection with the construction and improvement of
the aforegoing subway and elevated railways and other transit fa-
cilities, two million two hundred thousand dollars
2,200,000
Provided, That any surplus or balance remaining in any of the foregoing items,
after the completion of the work therein specified, shall be used toward the com-
pletion of the work in any of the other items whereunder there has not been suffi-
cient money provided to complete that particular work."
22
ESTIMATE “A”-MARCH, 1917
ESTIMATED COST OF EQUIPMENT FOR CITY-BUILT LINES
PHILADELPHIA RAPID TRANSIT COMPANY-OPERATOR
North
Broad and So. Broad Frankford
Loop
Darby Northwest
Byberry
Surface
Total
INITIAL EQUIPMENT:
Fixed Equipment:
Tracks, Signals, Third Rails, Lighting and
Station Equipment
Cars, Power and Accessories:
Cars
Car Houses, Yards and Shops.
Feeders
Sub-stations
Overhead Line
TOTAL__.
Total Initial Equipment_.
Interest Funded
Total Initial Investment..
INVESTMENT BY YEARS:
1919__
Added 1920:
Interest Funded
Fixed
Cars and Power.
$1,459,000 $430,000 $476,000 $400,000 $875,000
$3,640,000
2,450,000
800,000 1,075,000
913,000
1,190,000
225,000
567,000
460,000
450,000
143,000
216,000
211,000
665,000
212,000
324,000
317,000
1,010,000 $30,000 6,278,000
450,000
264,000 40,000
396,000
2,892,000
1,324,000
15,000
1,929,000
53,000
53,000
$4,755,000 $1,380,000 $2,182,000 $1,901,000 $2,120,000 $138,000 $12,476,000
$2,301,000 $2,995,000 $138,000 $16,116,000
138,000 180,000 8,000 967,000
|
$6,214,000 $1,810,000 $2,658,000
372,000 109,000 160,000
$6,586,000 $1,919,000 $2,818,000 $2,439,000 $3,175,000 $146,000 $17,083,000
1920
Added 1921:
Interest Funded
Cars and Power..
1921
$6,214,000
Added 1922:
Interest Funded
Cars and Power..
372,000
570,000
1922-
$7,156,000
| | |
$2,658,000
$138,000 $2,796,000
160,000
8,000
225,000
732,000
$3,775,000 $2,301,000
6,000
$152,000 $6,228,000
147,000
$3,922,000 $2,667,000
138,000
- 228,000
6,000
$158,000 $12,961,000
147,000
6,000
163,000
$4,085,000 $2,814,000 $2,995,000 $164,000 $17,214,000
Added 1923:
Interest Funded
J
Fixed
Cars and Power.
639,000
1,600,000
130,000
147,000
180,000
261,000
6,000
$9,395,000 $1,810,000 $4,215,000 $2,961,000 $3,436,000 $170,000 $21,987,000
1923
Added 1924:
1924__.
Interest Funded
Cars and Power_.
109,000
65,000
178,000
277,000
425,000
200,000
5,000
$9,820,000 $1,984,000 $4,415,000 $3,139,000 $3,713,000 $175,000 $23,246,000
Added 1925:
1925__.
Fixed
Cars and Power.
Added 1926:
Cars and Power..
1926___
Added 1927:
Cars and power.
1927
Added 1928:
1928--
Cars and Power..
Added 1929:
Cars and Power..
Cars and Power..
156,000
(A) 315,000
335,000
98,000
5,000
569,000 49,000
$10,389,000 $2,033,000 $4,571,000 $3,789,000 $3,811,000 $180,000 $24,773,000
376,000 49,000 209,000 167,000 188,000 5,000
$10,765,000 $2,082,000 $4,780,000 $3,956,000 $3,999,000 $185,000 $25,767,000
84,000
167,000
146,000
167,000 10,000
398,000
$11,163,000 $2,166,000 $4,947,000 $4,102,000 $4,166,000 $195,000 $26,739,000
188,000
209,000
146,000
440,000 63,000
5,000
$11,603,000 $2,229,000 $5,135,000 $4,311,000 $4,312,000 $200,000 $27,790,000
418,000
42,000 230,000 167,000 167,000 4,000
$12,021,000 $2,271,000 $5,365,000 $4,478,000 $4,479,000 $204,000 $28,818,000
209,000
167,000
398,000 42,000
188,000
4,000
$12,419,000 $2,313,000 $5,574,000 $4,666,000 $4,646,000 $208,000 $29,826,000
1929_.
Added 1930:
1930-Total Investment
(A) Equipment for Chestnut Street Subway.
NOTE:-No expenditures for power-generating plant are included, it being assumed that all power will be purchased.
23
Frankford Line
COMPARISON OF VARIOUS ESTIMATES OF COST OF CITY-BUILT RAPID TRANSIT SYSTEM
Approxi-
mate
Miles of
Line
Approxi-
mate
Miles of
Track
Estimates of
Oost as
Originally
Computed and
Shown in
1913 Report
Revised
Estimate of
Cost as
Computed
November 9,
1915
Revised
Estimate of
Cost as Scaled
Down for
Use in 1915
Report
(B)
Lines
Authorized by
Councils
July 2, 1915,
Plus Delivery
Loop.
Estimated
Cost as
Computed
November 9,
1915
Lines
Authorized by
Ordinance of
July 20, 1916.
Estimated Cost
as Computed
February 16,
1917
Lines
Authorized by
Ordinance of
>
July 20
1916, with
Amounts as
Contained
Therein
Amounts
Appropriated
July 2
1915
Arch Street to Bridge Street.
Bridge Street to Rhawn Street.
6.34
3.00
12.68
6.00
$5,625,000
$5,600,000
}
TOTAL-Frankford Line
9.34
18.68
$5,625,000
$7,400,000
1,800,000 $5,700,000 {
$5,700,000
$5,600,000
$7,400,000 $8,229,000
1,800,000 3,237,000
$4,992,000
} $4,400,000
$3,000,000
$4,400,000 $3,000,000
Broad Street Line
Broad Street-Pike to Olney Avenue__
2.16
4.32
4,200,000
3,900,000
Broad Street-Pike to Ridge Ave. (4 tracks)
Broad Street-Ridge Avenue to Spruce Street.
Broad Street-Spruce Street to League Island.
Northwest Branch
3.18
12.72
1.40
5.60
19,305,000 (A)
(12,700,000
11,200,000
4,200,000 6,913,000
12,700,000 | 14,283,000
7,800,000
6,900,000
3.40
6.80
5,080,000
5,100,000
4,800,000
7,800,000
5,100,000
2.00
4.00
1,994,000
2,100,000
2,100,000
Northeast Branch on Northeast Boulevard..
2.10
4.20
1,560,000
1,500,000
TOTAL-Broad Street Line--
14.24
|
$27,939,000
$33,400,000
1,500,000
$29,400,000
9,461,000
8,371,000
2,100,000 2,884,000
1,500,000 2,884,000
$33,400,000 $44,796,000
25,000,000 3,000,000
$25,000,000 $3,000,000
Delivery Loop (3 sides with curves into Broad
Street)
1.50
3.00
$5,018,000
$7,600,000
$6,300,000
$7,600,000 $8,028,000
$7,600,000
Darby-Woodland Avenue Elevated_
14.50 (D)
Parkway Line-Twenty-ninth Street.
8.09
9.00
16.18
(5.43 (C) 10.86(D) 4,239,000 (C)
4,200,000 (C)
3,200,000 (C)
4,944,000 (D)
4,200,000
7,500,000
7,500,000
Real Estate
2,761,000
2,300,000
1,800,000
2,100,000
10,878,000
4,000,000
7,500,000
2,200,000
TOTAL (excluding Chestnut Street Sub-
way and Byberry Line)
38.60
86.36
$45,582,000
$62,400,000
$54,900,000
$50,500,000 $80,875,000
$21,500,000
Chestnut Street Subway.
2.63
Byberry Surface Line_..
GRAND TOTAL
10.00
5.26
20.00
51.23
111.62
7,484,000
$53,066,000
ƒ 8,500,000
1,100,000
$72,000,000
1,100,000
8,905,000
1,200,000
5,000,000
1,200,000
$56,000,000 (B) $50,500,000 $90,980,000
$57,100,000 $6,000,000
24
(A) Via Fifteenth Street, from Arch to Walnut Street, the additional cost via City Hall route is given in 1914 report as $1,750,000.
(B) Prices scaled on assumption that the favorable and low prices obtained on sections placed under contract during 1915 could be obtained for the other lines
recommended.
(C)
Estimated cost to Darby-Distance, 5.43 miles.
(D) Estimated cost to City Line-Distance, 4.50 miles.
>
1915 Appropriation
1916 Ordinance
Total Authorization
$6,000,000
57,100,000
$63,100,000
.
Estimates of Cost of Construction.
In estimating the financial results of the City's program of transit development,
it has been necessary to assume a schedule of construction based upon the funds au-
thorized and the ability of the Department to furnish plans. In order to determine
the amount of construction which the funds appropriated will cover, estimates for
each line, based on present prices, have been made by the Department and are included
herewith.
These estimates have been checked by Messrs. Ford, Bacon & Davis, found con-
servative and used in their report, with the reasonable assumption that by the time
funds beyond $45,000,000 will be needed to carry on the program, prices may have
been reduced by say 10 per cent., and they have so assumed. The making of esti-
mates of the cost of construction work is never an exact science, even in times of
normal and stable prices. It is an especially difficult task, under present conditions,
to estimate on subway work where contracts require two or three years for completion
with so many unknown factors, as to labor and the after-effects of the present war.
In order to show graphically the schedule which has been assumed for the con-
struction and financing of the City's system, a progress chart is included, giving the
rate of expenditure upon each of the lines authorized. This was prepared on the as-
sumption that the certificates requested on November 13, 1916, December 28, 1916, and
February 5, 1917, would be promptly granted so that the lines authorized could be
placed under contract on or about the dates shown on this diagram.
The plan on which this diagram is based is that the Broad Street line, between
South Street and Cayuga Street, which, on the basis of present prices, can probably be
constructed with the $28,000,000 now available, could be placed in operation July 1,
1920, and the delivery loop on the same date.
The Frankford elevated line, between Arch Street and Dyre Street, to be placed
in operation July 1, 1918.
The Darby line, from Thirtieth and Market Streets to Sixty-seventh and Wood-
land Avenue, July 1, 1919.
The first section of the Byberry line, July, 1918, and second section when streets
are opened and ready.
The Parkway-Roxborough line, as far as Henry Avenue and Bowman Street, July
1, 1921.
The balance of the construction provided for in the construction program would
be completed at a later date, based on the time when the additional money became
available, and by the time the additional money is available construction prices may
have lowered sufficiently so that less money will be required than the present esti-
mate indicates.
All these dates of construction are, of course, predicated upon an assumption
that the system will be operated under a lease which will be executed not later than
July 1, 1917, in order that the equipment may be ordered promptly. The delivery
on cars, motors, electrical apparatus, etc., is now such that it is improbable that
equipment could be secured in less than a year from the signing of the lease.
25
The Frankford line is the only line which may be affected by the lease negotia-
tions, and in order that no delay may result, the Department has suggested that the
City arrange to provide the cars for this line, and for that purpose, if possible, apply
the funds now in the hands of the Sinking Fund Commission, appointed under the
contract of 1907, provided this can be legally done.
The progress chart shows that with the exception of the $5,000,000 appropriated
for the Chestnut Street Subway, all the money available now for construction will be
spent by the end of 1920, and in order to accomplish this contracts must be let promptly
during this era of high prices.
•
Diagrams 1 and 2 show the effect of the overhead charges on the total cost of
the City's system of lines, and also some of the bad effects of paying the required in-
terest and sinking funds on the City's money out of the bond issue-only about 85
cents out of each $1 of bonds being available for construction.
The City's Position With Regard to Operation.
The City's position on transit development may be briefly stated thus:
Philadelphia desires that a modern, comprehensive, rapid transit service shall be
promptly added to the existing service and supplied, if possible, by the Philadelphia
Rapid Transit Company or its subsidiaries, but at a 5-cent fare, with universal trans-
fers.
By the loans of June 30, 1915, and June 29, 1916, the citizens authorized the con-
struction of subways and elevated structures to the extent of $63,100,000. In voting
this money, the citizens were providing the right-of-way for a great public improve-
ment in the transportation service of the City. This money, however, cannot provide
the actual service desired, as none of it can be used for equipment; and it is available
for the construction of the right-of-way only.
Under the law, the City may provide for the operation of the lines by any one of the
following three methods, which are given in the order that this Department regards
them as desirable:
1. Leasing the lines on a satisfactory basis to the existing company.
2. Leasing the lines on a satisfactory basis to an operator independent of the
existing company, or
3. Operation by the City as a municipal enterprise.
Under the two latter methods the City's system would become a competitor of the
existing company.
It is not to be understood that it is impossible for the City to operate these lines
satisfactorily, but that is a procedure not to be desired, unless it proves to be im-
possible to obtain an operator upon conditions which the City will be justified in ac-
cepting.
Co-operation of the Philadelphia Rapid Transit Company Desired.
In authorizing the construction of subways and elevated roads, the City had no
desire to enter into the transportation business as an operator of its own system of
26
CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
DIAGRAM SHOWING ESTIMATED DISTRIBUTION OF MONEY
APPROPRIATED FOR
CONSTRUCTION OF RAPID TRANSIT LINES
BONDS ISSUED
FOR
SUBWAYS
OVERHEAD CHARGES
ENGINEERING
INCIDENTALS
AND CON-
TINGENGIES
7%
AND SUPER-
NTENDENCE
6%
INTEREST AND
SINKING FUND
CHARGES DURING
CONSTRUCTION
AND
FOR ONE YEAR THERE
AFTER
-
14%
LIMIT OF CONTRACTS
TOTAL OF BIDS
FOR
CONSTRUCTION
OR
FACE OF GONTRACTS
73%
BONDS ISSUED
FOR
ELEVATEDS
EAD CHARGES
INGIDENTALS
AND CON-
TINGENCIES
ENGINEERING
AND SUPERING
TENDENCE
INTEREST AND
SINKING FUND
6%
GHARGES DURING
GONSTRUCTION AND
7%
FOR ONE YEAR THEREAFTER
10%
LIMIT OF CONTRACTS
TOTAL OF BIDS
FOR
CONSTRUCTION.
OR
FACE OF CONTRACTS,
/77%
PERCENTAGES ALLOWED FOR OVERHEAD CHARGES
BASED ON TOTAL BASED ON FACE
BOND ISSUE OF CONTRACT
SUBWAY ELEVATED SUBWAY ELEVATED
7% 7% 10% 9%
INCIDENTALS AND CONTINGENCIES
ENGINEERING AND SUPERINTENDENCE
INTEREST AND SINKING FUND
TOTAL
6%
6%
8% 8%
14%
10%
19%
13%
27%
23%
37% 30%
MARCH 1917
DIAGRAM NO. 1
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$9,000,000
CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
DELIVERY LOOP
$8,000,000
DIAGRAM SHOWING ESTIMATED
DISTRIBUTION OF TOTAL COST
ASSUMING
A THREE YEAR CONSTRUCTION PERIOD
AND SALE OF BONDS
AS FUNDS ARE NEEDED
LEGEND
Annual Interest and Sinking Fund Charges
Cumulative Interest and Sinking Fund Charges
NOTES:-
$7,600,000 appropriated for this section
by ordinance of July 20, 1916.
Minimum Interest and Sinking Fund
Charges-17.0% of Face of Contracts.
$3,000,000
$56,000
$2,000,000
$29,000
$1,000,000
CONTRACT.
LET
WORK
BEGINS
$1,500,000-
$1,250,000
ASSUMED
RATE
OF
$87,000
-$1,250,000
EXPENDITURE FOR
$119,000
TH
$1,250,000-
FIRST YEAR
SECOND YEAR
THIRD YEAR
$ 8,028,000
TOTAL EST. COST 3-1-1917 BASED ON INTEREST SINKING FUND = 19% OF FACE OF CONT
$154,000
$1,500,000-
$181,000
$810,000
ENGINEERING
AND CONSTRUCTION
$373 000
COMPLETED
TOTAL OF CONTRACTS & ENGINEERING
$165,000 CONTRACTS TO BE BID ON
$171,000 INCIDENTALS 10% OF FACE
*203
FACE OF CONTRACT 203
$1,713,715-
(ACTUAL BID)
$242,000 INCIDENTALS 10% OF FACE
$7,914,000
(FUNDED INTEREST
AND SINKING
$999,000 FUND CHARGES
(ENGINEERING ÉST.
$469,000 AT 8% OF FACE
OF CONTRACT
$469,000 649
CONSTR'N
COMPLETED
CONSTRUCTION
FACE OF CONTRACT *202
-$2,420,303
(ACTUAL BID)
$6,915,000
TOTAL OF CONTRACTS)
& ENGINEERING
$158,000 INCIDENTALS 10% OF FACE
FACE OF CONTRACT
-$1,575,760-
(ACTUAL BID)
~IYEAR AFTER CONSTRUCTION
IS COMPLETED
MARCH 1917
DIAGRAM NO. 2
high-speed lines competing with the existing company, or to deprive that company
of any of the rights and privileges justly belonging to it.
The City desires and expects co-operation from the company.
The City's view as to the terms and provisions of a fair contract with the Phila-
delphia Rapid Transit Company may be admirably stated as follows:
"All careful and disinterested students now recognize, notwithstanding great
vacillation of the United States Supreme Court on the subject, that the necessity
for super-regulation arises solely from the fact that the industries now under re-
view are monopolistic. It cannot be said too often that regulation is simply a
substitute for competition.
"Gains due to speculation, stock waterings, frauds, extortions, excessive
charges, surplus and unearned increment ought not to be and cannot be allowed
to go to owners of public utilities. Past claims ought to be compromised or ad-
justed in some way and a new start made on a sound basis. With a complete, ami-
cable and final settlement of this question, all would agree that all that owners of
public utilities are entitled to in the future is a safeguarding of the money they
contribute, and an annual rate of income commensurate with the risk involved.” *
The attitude of this Department now and from the beginning of negotiations with
the Philadelphia Rapid Transit Company is expressed in the following extract from
the original report of the Transit Commissioner (p. 17). In this statement the Phila-
delphia Rapid Transit Company is considered as representing all the transit interests
as a unit.
"The Philadelphia Rapid Transit Company has enjoyed, up to this time, a
practically exclusive franchise in Philadelphia. Every such franchise carries with
it an obligation, namely, that its facilities be operated and extended as may be
necessary and reasonable to afford adequate and proper service to the public. Con-
tinued growth of the City is dependent upon the development of adequate transit
facilities and is essential to the welfare of the Philadelphia Rapid Transit Com-
pany. It is expected that the management of that company will enter into the
forthcoming negotiations in a fair, broad-minded and progressive spirit."
Conflicting Premises of Negotiations.
“If this were a matter between two corporations, negotiations might be quickly
brought to a head. But the entire public has to be taken into consideration in this
case. Education, explanation and discussion of the merits of the various proposi-
tions are a necessary precedent to action." +
The negotiations for a contract to equip and operate the City's proposed lines
have progressed intermittently for about three years.
The public might well be at a loss to understand why so much negotiating should
be required.
*"HOW DOES INDUSTRIAL VALUATION DIFFER FROM PUBLIC UTILITY VALUATION?" Presented by John
H. Gray, Professor of Economics, University of Minnesota, at the Annual Meeting of the American
Society of Mechanical Engineers, New York, December, 1916.
+ Testimony of Jesse W. Lilienthal, President of the United Railroads of San Francisco (See Electric
Railway Journal, February 10, 1917).
27
Į
The people have been told that the City's high-speed lines will be profitable.
They have been told that universal 5-cent fares, with free transfers and no ex-
change tickets, will be provided.
They have been told that no increase in taxes will result from this contract.
The Philadelphia Rapid Transit Company has stated publicly that it is now earn-
ing 8 per cent. on its stock.
The people cannot reconcile these statements with the fact that such a contract
is very difficult to secure, and there is a disposition to question the energy, ability and
motives of the City's officials because such a contract is not obtained at once.
They cannot understand why, if the present system is earning 8 per cent., and the
City's system be added, that the result should not be an increase of profit.
This outline is here presented in order to show clearly that some of the statements
referred to do not agree with the facts, and thus to get a proper viewpoint before
going into the details of the company's proposal.
The Difficulties of the Case.
From the very start the negotiations for a contract have been hampered on the
City's side by the 1907 contract and the lack of enabling legislation. On the com-
pany's side it has been hampered by the voracious demands of its leaseholds. Since
July 20, 1916, the City has had additional handicaps in a fixed and inflexible program
of transit development and the abnormally high cost of construction work.
The attempt to bring the City and the company into a partnership shows, as never
before, the effect of years of uncontrolled financing by the company, ill-considered legis-
lation on the part of the City in the past, and the recent adoption by the City of an
ambitious transit program.
The situation is acute, and either the City must make concessions in its program
or the company in its capital charges. Or, if neither will yield, the burden will fall
on the taxpayers.
As pointed out a year ago by this Department, there is no doubt that the results
would be better financially to both the City and the company if the City's construction
program were modified. This Department, however, regards that matter as now be-
yond its jurisdiction, and any modification of the program now authorized, either as
to change in lines or change in fare, will have to be made by the people, or their repre-
sentatives in Councils.
This report points out that on a flat 5-cent fare basis a serious obstruction stand-
ing between the City and the company in the lease negotiations is the huge fixed
charges of the company. These amounted in 1916 to nearly 2 cents out of every 5-cent
fare collected.
It is impossible to stretch the remaining 3 cents to cover both the company's pres-
ent and the City's new demands.
These burdensome fixed charges are the result of:
1. A total lack of supervision by any responsible public body over the methods
employed in financing the company in the past.
28
2. Under-estimation by the company of the capital requirements of the business,
and hence over-estimation of the net earnings, thereby discounting the future growth.
3. A failure by the company to provide for the amortization of any of the super-
seded captial invested in the business.
The company now seems to feel that the proper plan is to add another lease to the
present complex tangle of leases and contracts. While knowing well that the real
difficulty lies in vested interests of underlying and leased companies, the company
makes no suggestions as to any reorganization or plan of readjustment.
The people must now understand that the Philadelphia Rapid Transit Company
is really but the outer and visible shell around the existing system, protecting all the
subsidiary companies and assuming all their obligations to the public. It is not the
substance of the transit situation, but the visible and active head of the large vested
traction interests.
The Philadelphia Rapid Transit Company feels that in this proposed contract the
City should recognize and deal with it only, protecting the subsidiary companies un-
der the 1907 contract.
The City feels that under this contract the entire transportation system (the
company and all its subsidiaries) will become and should be treated as a unit—the
Philadelphia Rapid Transit Company being the spokesman for that unit.
It must be understood that as "unified" operation only is contemplated by the
company, there will be but one source of income or revenue, namely, the earnings of
the merged system. As part of the surface car riding will be simply transferred from
the company's lines to the City's, no appreciable increase in income above the nor-
mal rate can be expected by the addition of the City's lines to the existing system.
These new lines, however, will carry burdens of their own, and the struggle for an
operating contract has been and is now a controversy principally over the question-
To what extent is the Company entitled to the earnings of the merged system before the
City gets a return on its investment?
To begin with, the difficulty is purely financial and lies in the probability that
sufficient income for the requirements of the City's program, as adopted, cannot be
produced for many years. This situation is made more difficult by the excessive rentals
and payments made by the company to its subsidiaries. The City is not striving to
secure a profit but to minimize its certain cash loss.
New Factors Resulting From City's Program.
To explain the difficulties, it will be necessary to start with three primary facts
or conditions which result from the City's program of transit development, and hence
underlie the negotiations:
1. The City is building a system of high-speed and surface lines that is now
estimated to cost at the beginning of operation at least $90,000,000, including their
equipment, and may cost $110,000,000.
29
The interest and sinking fund (if assumed at 5 per cent.) on this money will
be $4,500,000 per year at least, and may be as much as $5,500,000 per year.
Even if the City should expend only the $63,000,000 now authorized, and
even if the equipment should cost only $12,000,000, the total of $75,000,000 will
involve charges of $3,900,000 per year.
2. All of the City's lines parallel and compete for passengers with the com-
pany's surface lines on the same or adjacent streets, so that the operation of the
City's lines means a duplication of the present service to a considerable extent.
The allowable reduction of service on the surface lines will not offset the
cost of operation of the City's lines. The extra cost in the early years will amount
to about 10 per cent. of the gross revenue, or as much as $2,500,000 per year.
3. In order to provide a universal 5-cent fare, with free transfers, it is neces-
sary that the Philadelphia Rapid Transit Company give up about $900,000 per
year income from exchange tickets, which is now included in and represents 3 of
the 8 per cent. which the company claims to be earning on its capital stock.
For the early years of operation the annual excess cost will, therefore, be at least
as follows:
Item 1.
Item 2
Item 3
$3,900,000—Interest and Sinking Fund
2,500,000-Excess Operating Expenses
900,000-Exchange Ticket Revenue
Total excess cost.... $7,300,000 per year
Theoretically, this cost should be paid from the profits of the business. If the
City's program were not increasing this cost tremendously, it would be just and proper
to insist that it should all be paid from the company's surplus.
The basic difficulty in fixing the terms of a contract lies in determining what is
a fair division of this total cost and how it shall be carried.
Regardless of all that may have been told the people, it is easily seen that practically all
this cost is excess cost over and above the present cost of the Philadelphia Rapid Transit Com-
pany's service, and for many years it will be far greater than the Company's whole surplus
available for dividends.
Limitations of Company and City.
If the City is to make a contract with the Philadelphia Rapid Transit Company, the
basis of the Company's participation will have to be its financial limitations rather than its
moral and legal obligations.
The terms of the Contract must be based not on how far the Company ought to go, but
how far it can go in sharing the excess cost involved by the City's program.
The limit to which the company can go in an offer to meet the City is the appli-
cation of its whole surplus available for dividends to this excess cost. Many people
who know the real cause of the company's inability to go further insist that even
the whole surplus is not enough.
The limit to which the Company offers to go is to apply to the excess cost 90 per cent.
of the surplus after paying a dividend of $1,500,000 annually.
30
PER CENT. OF GROSS REVENUE
ESTIMATE "A".
70%
ACTUAL-
ESTIMATED.
68
66
64
62
60
58
56
54
52
50
48
46
44
42
40
38
36
34
32
CITY BUILT LINES AND COMPANY'S SYSTEM COMBINED.
OPERATING RATIO.
OPERATING
RATIO
COMPANY'S
SYSTEM.
CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
OPERATING EXPENSES,TAXES AND RESERVES
(Including Payments under 1907 Contract)
PER CENT. OF GROSS REVENUE
UNIFIED SYSTEM AS CONTEMPLATED
BY
ORDINANCE APPROVED JULY 20, 1916
OPERATION BY PHILADELPHIA RAPID TRANSIT COMPANY
30%
1895
1900
1905
1910
1915
1920
1925
1930
1935
1940
70%
68%
66%
64%
62%
60%
42%
40%
44%
46%
52% K
50%
48%
58%
56%
54%
PER CENT. OF GROSS REVENUE.
38%
30%
1945
1950
1955
1960
1965
1970
YEARS TO JUNE 30 TH
MARCH 1917.
DIAGRAM NO. 4
PHILADELPHIA
FIXED CHARGES 2/10
CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
DIAGRAM OF DISTRIBUTION OF INCOME
ON
PHILADELPHIA AND BOSTON SYSTEMS
For The Year Ended June 30, 1916
i
FIXED CHARGES 14
BOSTON
RENT FOR
ELEASED ROADS
ERENTALS PAID TO LEASED ROADS
CITY SINKING FUND
SURPLUS
APPLICABLE
TO HIGH-SPEED
DEVELOPMENT, STOCK
DIVIDENDS, ETC
3/109
INTEREST:
(BONDS):
TAXES
3/10¢
SURPLUS APPLICA-
BLE TO HIGH-SPEED
DEVELOPMENT, STOCK
DIVIDENDS, ETC.
6/10¢
OPERATING EXPENSES
210¢
PHILADELPHIA
PER REVENUE
PASSENGER
PER CENT. OF
GROSS EARNINGS
2/10
210 €
51%
38%
3/10
5 %
3/10
6 %
5/10
100%
SUMMARY
OPERATING EXPENSES
FIXED
CHARGES
TAXES
SURPLUS
TOTAL
INTEREST
(BONDS)
TAXES
3/100
OPERATING EXPENSES
3/10¢
BOSTON
PER CENT. OF
PER REVENUE
GROSS EARNINGS
PASSENGER
64%
33/10 £
19%
1
e
6%
3/10 ¢
11%
10
100%
5/10€
MARCH 1917.
The limit of expenditure to which the City is now authorized to go is $3,215,000
per year, representing full interest and sinking fund on the $63,100,000 construction
funds appropriated.
The limit to which the City is now asked by the Philadelphia Rapid Transit Com-
pany to go is to contribute at least $4,000,000 per year in cash as follows:
Interest and sinking fund on $63,100,000 authorized
1907
Contract
Abatement of paving payment
Abatement of dividend taxes
$3,215,000
550,000
115,000
120,000
$4,000,000
Requirements
Suspension of sinking fund
Total___
This sum will be larger as the construction cost rises above $63,100,000.
If the growth in revenue be not sufficient to meet the balance, the company asks
the right to impose a charge for transfers sufficient to protect its own fixed charges and
dividends.
This is a brief outline of the contract situation.
The City is aiming at the higher limit, the company at the lower; hence the long
negotiations as to how the company and the City shall divide the losses.
This report of Ford, Bacon & Davis suggests several ways of providing part or
all of the excess cost above the proposed 5-cent fare, and the contract between the com-
pany and the City must specify which way or ways shall be adopted.
Financial Conditions Underlying Transit Development in Boston.
Diagram No. 3 shows the distribution of income from the transit systems of
Philadelphia and Boston for the year 1916.
The Boston transit system is a working example of a unified system of operation
along lines similar to what Philadelphia contemplates, hence a comparison is here
shown between its operating costs and those of the Philadelphia Rapid Transit Com-
pany for the year 1916.
The Boston system has been conservatively financed, and a study of this diagram
and the accompanying table shows that the capital charges of the Boston surface sys-
tem represent approximately only one-half the burden being carried by the Philadel-
phia surface system, being 1 cent in Boston, as compared with over 2 cents per revenue
passenger in Philadelphia.
This difference of 1 cent per passenger in fixed charges would have amounted to
$4,810,000 in 1916, or enough to carry practically all the cost of the City's program.
As the Boston system has never been exploited by promoters, or suffered from
operations in high finance, and in its capitalization has had no "water" whatever,
its service probably represents the maximum which can be secured for a 5-cent fare.
•
In Boston there is but one primary company-the Boston Elevated Railroad—and
one main subsidiary controlling the surface system-the West End Street Railway
Company-making the situation relatively simple as compared with Philadelphia. In
Boston the City subways are leased by the company at a rental equal to the City's
charges thereon.
31
DISCUSSION AND ANALYSIS OF THE COMPANY'S PROPOSAL
In this analysis of the proposal for equipment and operation of the City's system
by the Philadelphia Rapid Transit Company, all comments, criticisms and suggestions
are made solely for the purpose of protecting the City and preventing its being ex-
ploited for the protection and bolstering up of the company by the use of the public
credit resources and good nature.
Many people feel that the City was deliberately wronged by the 1907 contract and
the Department should therefore approach this as if danger lurked in every clause.
If this contract required only thirty days or a year for its execution and fulfill-
ment it might be hastily adopted. The results could be estimated with some degree of
accuracy. This, however, is a contract which will require fifty years for its fulfill-
ment, and during that time many changes will occur that cannot now be foreseen, or
the results estimated.
There are indications that the company, knowing the City's desire to have the
Frankford line operated at the earliest possible date, is endeavoring to take advantage
of this condition by obtaining hasty action in the acceptance of a contract favorable
only to itself. Such has been the usual method of procedure in transit negotiations.
This is the most important matter that has ever been before the City in its entire his-
tory. The proposed contract will determine matters of public policy for years to come, and
will commit the City to huge financial obligations.
The people of Philadelphia should insist on the most painstaking study and dis-
cussion, and should not consent to hasty action.
The contract will affect the welfare of every property owner and citizen, and as
drawn it cannot be undone for fifty years.
Scope of Report.
It is not to be expected that this report covers every detail of the company's pro-
posal, but an effort has been made to cover the main and fundamental points, and the
analysis has been carried only far enough to show that the plan on which it is formu-
lated probably cannot be amended so as to remove its inherent faults and thereby per
mit of its acceptance by the City.
The draft contains scores of minor defects, mostly in wording, which might lead
to dispute as to interpretation. These have not been considered in this report.
Audit by City Controller.
The analysis of the company's operating statistics and finances, which is being
prepared by the City Controller, is not yet ready, and hence has not been available in
3
33
the preparation of this analysis. That analysis will be of great importance in deter-
mining what the real profit in the business has been during recent years, and will be
useful in forecasting the profits of the business in the future. Before any final terms
for a contract can be formulated, the Controller's report should be completed and the
results analyzed.
General Principles and Form of Contract.
In the preparation of a contract of this kind, the legal and moral obligations of
the contracting parties to each other should first be ascertained and mutually recog
nized.
The company's idea of a fair and equitable contract may, and probably will, dif-
fer greatly from the City's idea, as the viewpoints of the two contracting parties are
diametrically opposed.
General Discussion of the Company's Proposal.
The proposal embodies the company's interpretation of its own and the City's
existing legal rights and obligations. The spirit underlying the proposal is that the
company's property and rights should receive first consideration and protection.
This report shows that the plan proposed in the draft contains many features dis-
advantageous to the City, which originate in and result partly from the company's de-
sire to protect itself and its subsidiaries and insure a profit at the City's expense, and
partly from the City's adopted plan of transit development.
The merger or unification plan upon which the proposal is based is easier and
much more practicable to carry out from an operating standpoint than the plans pre-
viously considered, which involve complex accounting, but at the same time it intro-
duces dangers against which the City should be safeguarded.
The City is aiming to secure high-grade service at a minimum of cost; the Company is en-
deavoring to secure and protect the return upon its past and future investments.
The City cannot permit the Philadelphia Rapid Transit Company to take advantage
of or capitalize its strategic position to the disadvantage of the City.
The company by its proposition is endeavoring to profit by the fundamental un-
preparedness and seeming unwillingness of the City to enter upon a program aiming to
remedy past mistakes in the transit situation.. It is endeavoring to take advantage of
the peaceful characteristics of the citizens of the Quaker City and their aversion to a
commercial warfare. It is endeavoring to secure by this contract the exchange of the
cumulative non-guaranteed 6 per cent. stock provided under the 1907 contract for a
guaranteed cumulative preferred 5 per cent. stock and in addition it makes a further
claim on the surplus earnings of the merged system by demanding 10 per cent. of the
remaining profits as a guarantee that it shall be energetic and efficient in securing
these profits.
The offer of 90 per cent. of the remaining surplus earnings of the merged system
to the City may look liberal on its face, but it is the sole return of the City on its invest-
34
ment of over $87,000,000, on which the annual interest and sinking fund charges will be
$4,425,000. As shown by the estimate of the Consulting Engineers, it will be many
years under the most favorable conditions before the City's share will be sufficient to
pay these fixed charges.
The company has stated that its proposal is the united effort of its officials and
the former Director of this Department.
The City's representatives have not been consulted as to the fairness of the proposal or
the claims of the City in the preparation of this draft. It has been prepared by adroit and
skillful attorneys along lines which appear to have been dictated by bankers or guardians
of vested interests, so as to fully protect them regardless of the City's rights and interests.
In submitting this proposition, the company has presented no arguments, estimates,
facts or evidence which would warrant the incorporation into the contract of many fea-
tures which the citizens may well regard with suspicion.
The principal public statements that have been made on behalf of the proposal were
two issued by the former Director on December 21, 1916, and January 29, 1917, and they
furnish only his personal opinion with no facts or proof that the contract as presented
is fair to the public.
Control and Regulation of Service.
In discussing the proposed contract, the service to be rendered, which is the CAUSE for
the contract, is liable to be lost sight of in the controversy over the financial features, which
are the RESULT of the contract.
The City must guard well this feature of service to be rendered, and must retain in its
own control as far as possible the power to regulate the service, not only on the high-speed
lines, but on the surface lines as well. Adequate extension of the system must be provided
and a practical method of control of extensions must be devised.
Primarily the object of this contract on the part of the City is to get improved and proper
service. The results to the City as a financial venture are secondary. While the City cannot
expect a profit in cash from this contract for many years, it does not desire to have, and cannot
easily support, a large and direct loss. The net financial result of this partnership will be the
product of MANAGEMENT OF THE SYSTEM BY ONE PARTNER AND THE REGULA.
TION OF SERVICE AND EXTENSIONS OF LINES BY THE OTHER PARTNER.
I believe it will be almost impossible for the City to regulate the company prop-
erly and at the same time be a partner in the ownership and contingent profits of the
company.
The experience of the City in endeavoring to secure proper service and regulations
under the 1907 contract has always brought out the plea from the company, or its
friends, that as the City was in partnership with the company it should not object to
the company's acts.
I do not know of any place where a plan of operation such as here proposed, is in
successful operation. Even in New York City they have not attempted so bold an inno-
vation. There, while the City's money is invested in certain lines, the regulation of
service is under a State Public Service Commission of five members-not a City Direc-
35
tor, who will probably hold office for not more than four years and whose rulings as to
service cannot be enforced, except through the State Commission at Harrisburg.
If the Director be given the power needed to enforce his rulings, his power to con-
trol the company would afford tempting opportunities to an unscrupulous official.
The regulation should not be in the hands of an interested party-it is a judicial
function and cannot be safely left to any one man.
It may be assumed that the company's reason for limiting its dividend to a guar-
anteed and fixed amount is to insure it against drastic regulation at the hands of the
City.
The company being protected in its dividend will be indifferent to what regulation
and service requirements the City may impose.
The company's proposal in effect is this: The City may demand any service of us they
desire, provided it agrees in advance to pay the cost of all service, plus our profit.
The City, if it accepts this offer, by guaranteeing cost of service thereby guarantees the
effect of the company's management, as well as the profit.
The effect of this is to guarantee the company's entire operating expenses, including
wages of employees, salaries of officials fixed without reference to the City, and also add
another confirmation to the company's fixed charges, because to guarantee a NET PROFIT
must, of necessity, guarantee everything below it.
&
The City admits that the company is entitled to a proper compensation as the opera-
tor of the merged system, over and above the proper cost of service, but is not willing to
guarantee the company against the results of strikes or bad management. Neither is
the City willing to further guarantee the company's past and future obligations, with-
out restriction or reservation.
The City Asked Virtually to Lease the Company's System.
The company's present proposition is, in reality, the reverse of what it appears on
the surface.
It is in the form of a lease, but instead of the City's lines being rented to the
company, at a real cash rental, the City is placed in the position of another "Hold-
ing Company," leasing the existing system of the Philadelphia Rapid Transit Com-
pany, guaranteeing a certain definite cash rental to its present owners, and taking for
its share of the earnings and the return on its investment only what is left after all
payments are made for the use of the company's property.
Section 1, Article XIX, purports to show the consideration which the company is
to render in return for the City's system.
This should be read with care, as in reality it shows the consideration which the
City is to pay for the privilege of merging with the company's system.
The real consideration runs from the City and not to the City.
The Dividend or Preferential Payment of 5 Per Cent. Annually on $30,000,000 Capital Stock
Demanded by the Company.
This payment may be regarded in either of two ways:
1. As allowed return on capital invested.
36

UNION TRACTION & PHILA. RAPID TRANSIT COS.
FISCAL Surplus Available
Cash Paid Requirements to
in on Stock Pay 6% on Cash Paid in
at end of
Annual Cumulative
Fiscal Year
$150,000
540,000
UNION TRACTIONCOMPANY
Interest at 6% Rental Cash re-
on Cash Paid in since 1902quirements
for Interest
as per
andRental
Annual Cumulative Lease Cumulative
$150,000 $150,000
$150,000
YEAR
TO
JUNE 30
for Dividends
Annual Cumulative
1904 1,1 20,849
1905 1,308,210
1906 1,503997
1907 1,135,952
1908 1407,951
1896 $1,393,660-$1,393,660 $6,000,000 $150,000
1897 -851,934 -2245594 7,500,000 390,000
1898 24,622 -2,220,972 7,500,000 450,000
1899 617,073 -1,603,899 10,500,000
1900 938,021 -665878 10,500,000
1901 861,266 195,388 10,500,000
1902 1,078039 1,273427 13,500,000
1903 1,305,889 2,579,316 13,500,000 810,000
3,700.165 19,484,680 1,067,000
5,008,375 22 472,320 1,250,000 6,554,500
6,512,372 23,350,060 1,350,000 7,904,500
7,648,324 31,382,140 1652,000 9,556,500
390000 540,000
540,000
990,000
450,000 990,000
990,000
547,500
1,537,500
547,500 1,537.500
1,537,500
630 000
2,167,500
630000 2,167,500
2,167,500
630,000
2.797,500
630,000
3427,500
4,237,500
630000 2797.500
630000 3427,500
2,797,500
3,427,500
5,304,500
$900,000 $4,327,500
900,000 5227,500
1.200,000 6.427,500
1,200,000 7,627500
1,500,000 9,127,500
1909
1910
1911
1912
1913
1914
9,056,275 35,948,153 2,108,000 11,664,500
1,579,466 10.635,741 40.474.675 2.379,000 14,043,500
470,277 11,106,018 40A77,120 2430,000 16,473,500
1384440 12490458 40,477,1 20 2430.000 18903,500
1,649,310 14,139,768 40.477.120 2430,000 21,333,500
2.304583 16449,351 40,478,875 2,430,000 23,763,500
2,110,236 18559587 40478.875 2430,000 26,193,500
1915 2,021,705 20.581,292 40478.875 2430,000 28,623,500
1916 3,472,704 24,053,996 40,478,875 2,430,000 31,053,500
1,500,000 10,627,500
1,800,000 12,427,500
1,800,000 14227,500
1,800,000 16,027,500
1,800,000 17,827,500
1800 000 19,627,500
1,800,000 21,427,500
1800,000 23,227,500
1800,000 25,027,500
PHILADELPHIA RAPID TRANSIT CO.
Fiscal Surplus Available for Dindends Cash Paid Requirements to Pay 6
Year (After paying Union Rental) in on Stock
on Cash Paid in
to
at end of
June 30 Annual Cumulative Fiscal Year Annual Cumulative
P.R.T. CO.
Fiscal CASH REQUIREMENTS
Year TO PAY UNION TRACTION
CO. RENTAL
June30 ANNUAL
to
CUMULATIVE
1503 $900,000 $900,000
1,800,000
1,200,000 3,000,000l
1,200,000 4,200,000
1907-182,000-$182,000 $20,882,140 $570,000 $570,000 1907 1,500,000 5,700,000
1908 -92,049 -274,049 23448,153 1477,500 zp47.000 1908 1,500,000 7,200,000
1909 -220534 -494583 29974675 1,747,500 3795,000 1909 1,800,000 9,000,000
1910 1,329,723 -1,824,306 29977,120 1,800,000 5,595,000 1910 1,800,000 10,800,000
1911 -415,560 -2,239,866 29977.120 1,800,000 7.395,000 1911 1,800,000 12,600,000
1912 -150490 -2,390,356 29977,120 1,800,000 9,195,000 1912
1904
1905
1006
900,000
1913 509583 -1,880,773 29978,875 1,800,000 10,995.000
1914
1915
1916
1,800,000 14,400,000
1913 1,800,000 16,200,000
310,236 -1,570,537 29,978,875 1,800,000 12,795,000 1914 1,800,000 18,000,000
221,705 -1,348,832 29,978,875 1,800,000 14,595,000 1915 1,800,000 19,800,000
672,704 323,872 29.978,875 1,800,000 16.395,000 191G 1,800,000 21,600,000
$6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
Cash Requirements in order to pay
6% Cumulative on invested capital
of Union Traction Co and Philadelphia
Rapid Transit Co. since 1895.
UNION TRACTION COMPANY AND
PHILADELPHIA RAPID TRANSIT CO.
Comparison of Dividend and Lease
Requirements of Present System
with
Surplus Earnings of the System
Applicable to such Payments
Cumulative since 1895
Cumulative cash require
ments to pay 6% on P.R.T
Co's Stock as per Con-
fract of 1907.
Cosh Requirements in order
to pay 6% Cumulative on in-
vested capital of Phila. Rapid
Transit Co. since Jan 1, 1907
Cumulative Cash Require
ments to pay 6% on Cash
paid in on Union Traction
Co.from 1895 to 1902 and
Rental after 1902 as per
lease.
$34,000,000
33,000,000
32,000,000
31,000,000
30,000,000
29,000,000
28,000,000
27,000,000
26,000,000
25,000,000
24,000,000
23,000,000
22,000,000
21,000,000
20,000,000
19,000,000
18,000,000
17,000,000
16,000,000
15,000,000
14,000,000
13,000,000
12,000,000
11,000,000
10,000,000
9,000,000
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
JR.C.
-$1,000,000
-2000,000
-3,000,000
-4,000,000
-5000000
135
1895
HUNION TRACTION CO.
-5 56.81
1897
1898
bb81
боы
o
Surplus Earnings applicable
to dividends on stock of
Union Traction Co and Phila.
Rapid Transit Co. cumulative
from 1895.
1061
៖
1902
Cumulative Cash Re-
quirements to pay
Rental of Union
Traction Co.
Jan, 1907
Surplus earnings ap-
plicable to dividends
on stock of Phila.
Rapid Transit Co. cum-
ulative from Jan 1, 1907
PHILADELPHIA RAPID TRANSIT CO.
1903
1904
804
1905
90bl
407
1907
1907 CONTRACT
1908
YEARS TO JUNE 30TH
DIAGRAM NO. 6
bobl
106
0161
#
1911
116
STOTESBURY MANAGEMENT.
2112
1912
113
1913
1914
1915
1916
4117
1917
1918
606
1919
-$1,000,000
-2,000,000
-3,000,000
-4,000,000
-5,000ρoo
MARCH 1917
2. As compensation to the company for its co-operation in a unified system, and
for acting as operator and manager of the City's system.
In justification of this figure viewed as return on investment, it has been given out
semi-officially by the company that it represents the following:
Union Traction Company cash paid in on stock
Philadelphia Rapid Transit Company cash paid in on stock . . . .
$10,500,000
30,000,000
Deferred dividends on Philadelphia Rapid Transit Company stock since
1907
14,500,000
Total investment in Philadelphia Rapid Transit Company and
Union Traction Company stock
$55,000,000
Six per cent. on this represents
3,300,000
Union Traction Company guaranteed rental
1,800,000
Balance for Philadelphia Rapid Transit Company
$1,500,000
By capitalization of the accrued, unearned and unpaid dividends of the Philadel-
phia Rapid Transit Company, amounting to $14,500,000, and adding it to the Phila-
delphia Rapid Transit Company's capitalization, the statement would look like this:
Union Traction Company stock cash paid in
Philadelphia Rapid Transit Company stock and unpaid dividends
Total investment
$10,500,000
44,500,000
$55,000,000
This brings the same answer as before, but may look better to the public.
As there are 600,000 shares of Philadelphia Rapid Transit stock, the equivalent
value per share would be $74, whereas the market price is now about $31 per share.
Referring to the tables and diagram No. 6, it will be observed that from Janu-
ary 1, 1907, up to July 30, 1916, the actual cumulative surplus of the system has been
only $323,872, which for the period of nine years is a very slender margin over the
Union Traction Company rental. This shows that the net earnings have been at a
rate which would just about support the Union Traction Company's lease requirements.
According to the company's reports there has actually been earned available for
distribution on the stock of the Philadelphia Rapid Transit Company since its organi-
zation, up until July 1, 1916, a net cumulative surplus of only $1,180,000, representing
the total net surplus earnings of the system for fourteen years; hence the City has
only a remote asset in the provision of the contract of 1907, that the City shall share
equally in any surplus available for dividends above the amount required to pay 6 per
cent. cumulative on the company's stock after 1907.
Diagram No. 6 shows that the system must earn about $16,000,000 surplus above
the annual requirements of $1,800,000 before the City will receive a penny under the
1907 contract.
37
The plan to capitalize the dividends that never have been earned on the Philadel-
phia Rapid Transit Company's stock, to the extent of $14,500,000, is audacious in the
face of the statement on page 78 of the company's proposal, by which the company ap-
parently gives up these dividends, but in reality states that it gives up the distribution
of these dividends. It capitalizes these dividends, however, and to make matters worse,
it makes no provision for amortizing this portion of the capital out of the proposed
$1,500,000 dividend.
To pay 6 per cent. on the $14,500,000 of unpaid and unearned dividends which have
accrued on the Philadelphia Rapid Transit Company stock since 1907 will require
$870,000 annually.
Is the Company's Demand for a Fixed Dividend Justified?
The company's present condition of apparent opulence would disappear were it to
comply with its promises and obligations. It has continuously appealed to the public
for sympathy, although its financial troubles are the result of bad estimates of future
profits. When the company was organized the people were promised real rapid tran-
sit and the company purchased the charters, franchises, etc., for 112 miles of subway
and elevated track. (See frontispiece.) The City received about 17 miles, or less than
one-sixth of what was expected. The people did not realize then that the company's
scheme of financing these franchises would later react on the City's pockets. They
cared little what took place in franchise leasing so long as facilities were provided as
needed, and fares not increased.
No one cared then for the future, but now, after fourteen years, it is realized that the
company in 1902 blundered badly in its assumption of profits to be earned by the system,
and that as a result of the blunder the company has reached about the limit of its resources.
The City must come to its rescue if the company is not to be wrecked by the City's need for
improved transit facilities. If the company's estimate of profits, by which it justified the
leases and burdens assumed fourteen years ago, were so far in error, is their present estimate
of future profits any more reliable, particularly when it is evident that present prosperous
conditions are not a safe index of the future?
safe index of the future? This Department does not think so, and it is
opposed to any proposition to pay the company a guaranteed dividend when such guarantee
anticipates a charge for transfers and the placing of an unwarranted burden on the City
Treasury.
The City regards the demand for a fixed dividend of $1,500,000 a year as an
attempt on the company's part to carry out the past custom of making capital out of
the City's necessities.
The main reason why this Department is absolutely opposed to the payment to the
company of any fixed dividends, is that the system has not earned any appreciable sur-
plus in the past, and there is by no means any certainty as to the future.
This Department regards the City and company as entering into a partnership in
which the partners should share the net profits in proportion to their interest in the
property, and the Philadelphia Rapid Transit Company and its subsidiaries should be
considered as a unit at interest when compared with the City's interest.
38
The subsidiaries are now receiving about 28 per cent. of the gross revenue, or 64 per
cent. of the net earnings of the system, and any guarantee to the Philadelphia Rapid Tran-
sit Company's stockholders will be basically unfair to the City's stockholders-who are the
citizens.
ཝཱ
Financial Effect of a Fixed Dividend on the Value of the Stock of the Union Traction Company
and other Subsidiary Companies.
The financial effect on the underlying companies, particularly the Union Traction
Company, resulting from a contract with the City which guarantees the Philadelphia
Rapid Transit Company a surplus of any kind, has not received sufficient consideration.
The value of the stock of these underlying companies is largely determined by
the financial soundness of the company which leases them.
The Union Traction Company is leased by the Philadelphia Rapid Transit Com-
pany, and the security of its dividend is determined by the surplus which the Philadel-
phia Rapid Transit Company earns.
The Union Traction Company stock has a par value of $50, and the rental received
is equivalent to 6 per cent. annual dividends. The stock is now selling at about $43, or
$7 below par value, which is undoubtedly caused by the uncertainty regarding the
future of the Philadelphia Rapid Transit Company. With a contract executed between
the Philadelphia Rapid Transit Company and the City, by which the City guarantees
the Company a fixed rental, the Philadelphia Rapid Transit Company is immediately
removed from the class of corporations whose income is affected by business conditions,
and the City by a mere scratch of the pen, in signing the contract, practically guaran-
tees all the underlying stocks. The Union Traction Company stock, therefore, would
become the equivalent in stability of an irredeemable City bond at 6 per cent. As
Philadelphia City bonds sell on a 4 per cent. basis, the Union Traction Company stock
should be worth approximately $75, or over four times the cash paid in. The present
market value is about $43 per share, and this huge unearned increment of $32 per share,
or a total of $19,200,000 on the entire issue, goes directly to the holders of these stocks,
without one penny of compensation to the City for the guarantee.
This Department holds that if the Philadelphia Rapid Transit Company is guar-
anteed any return whatever, a reduction in the Union Traction Company rental to
correspond with its then financial standing as the equivalent of a City bond should
be made, and the 2 per cent. difference between the 4 per cent. and the 6 per cent. rating
should be available to the City as an amortization fund to eliminate the Union Traction
stock.
The present paid in value of the Union Traction Company stock is $17.50 per
share. The value of this stock at the time the system was leased to the Philadelphia
Rapid Transit Company was about $28 per share.
The present selling value is about $43 per share; the difference between the $17.50
and $28 represented the speculative value of the earnings of the system at that time.
The difference between $17.50 and $43 now represents the value of the Philadel-
phia Rapid Transit Company's guarantee on this stock, and if the City guarantees the
39
Philadelphia Rapid Transit Company and the corresponding value of the stock becomes
$75 the difference between the market value of the stock at $43, which is the value
under the Philadelphia Rapid Transit Company's guarantee, and the $75 with the
City's guarantee added will be $32, which is the amount the City will practically give
to the stockholders of the Union Traction Company without any corresponding return
on their part.
The intrinsic value of the equity securing the Union Traction Company stock will
constantly increase and it will become what is known as a "gilt-edged" security.
Another effect detrimental to the City's interest lies in the fact that in case of
recapture of these companies by the City, should it later be possible or desirable-by
agreement or otherwise the high market value of these stocks caused by the City's own
guarantee will probably have to be considered in estimating their recapture value.
The stocks of the subsidiary companies, guaranteed as they are by the lessor com-
panies, should receive a return commensurate only with the risk involved.*
Reasons for Caution in Guarantee of Dividend.
Before the City agrees to assume, for a period of fifty years, the support of the
capitalization of the company, and consequently that of all the underlying companies,
it should make certain that the company is entitled to such protection and that the City
can afford to give it. In this connection due weight should be given to the following
important considerations:
(a) Diminishing Profits in Street Railway Business.
During the past fifteen years the cost of street railway service per passenger has
increased greatly. The resultant decline in margin of profit and the large risks inci-
dent to the business have combined to render capital timid of street railway under-
takings at the present day. Wages constitute 62 per cent. of the operating expenses of
a street railway company and future wage scales are therefore of the greatest im-
portance (See Diagram No. 7). The hazards of business depressions, strikes, great
fires or other catastrophies, of revolutionary inventions, and of new forms of competi-
tion such as the "jitney," make the business one not to be entered into lightly. Under
the company's proposal the company would avoid and the City would assume all the
consequences of such tendencies and contingencies for the next fifty years, except as
the charge for transfers or increase in rate of fare make the traveling public share in
such increased expenses.
(b) Maintenance and New Construction Obligations.
Replacements of a large part of a street railway property are not made uniformly
from year to year and therefore there is on any property a large accrual of unper-
formed maintenance. On account of rapid improvements in apparatus such mainte-
nance or replacement accruals are difficult to calculate and few railway companies.
have reserve funds sufficient to cover them. When replacements so deferred become
necessary on the system of the Philadelphia Rapid Transit Company, the cost under
40
CENTS
per HOUR
U.T.CO.
P. R. T. Co.
36
STOTESBURY MANAGEMENT.
36¢
35
35¢
34
34¢
33
33¢
33¢
MAR. 1,1917
32
321
324
SEPT. 1.1916
31
311¢
31¢
MAY 1:1916
30
MAXIMUM RATE-
AXIMUM
SEPT.1.1913
30%
30¢
29
28
294
JULY.1.1913
28
29¢
28¢
28¢
MAY. 1.1913-
27
MAR.1.1917
27
27¢
26
SEPT.1.1916
JAN. 1.1913-
26
26¢
25
JULY. 1.1912, 2514
-MAY. 1.1916
25
24
JAN. 1.1912 24
23/2
SEPT.1.1913 MINIMUM RATE
EMINIMUM RATE
25¢
+
24¢
23
|JULY. 1. 1911-
23
22
21
JULY.1.1910.
STRIKE-FEB. 19-
STRIKE-MAY.30.1909;
222
-JULY 1.1913
222 MAY.1.1913
JAI
JAN. 1.1913
23¢
224
JULY. 1.1909
21
214
DEC. 1.1906
20
20
DEC.1.1902
CITY OF PHILADELPHIA
20¢
STRIKE
19
19
JAN. 1.1902
18
18%
FEB.1.1900
17
•1673-
16
DEPARTMENT OF CITY TRANSIT
DIAGRAM SHOWING
MAXIMUM AND MINIMUM
TRAINMEN'S WAGE SCALES
OF
PHILADELPHIA RAPID TRANSIT CO. SYSTEM
FROM 1895
NOTE:- ELEVATED MOTORMEN 3 PER HOUR MORE THAN ON
SURFACE LINES-
15
1895 1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906
1903 1904 1905 1906
1907 1908 1909 1910 1911
YEARS
1912 1913 1914 1915 1916 1917
1916 1917
1918
1918 1919 1920 1921
MARCH 1917
DIAGRAM NO. 7
CARS
OWNED
2400
4200
700
3600
600
3000
500
OF
TRACK
400
POPULATION IN CITY.
1800
300
MILES OF TRACK.
MILES
1200
200
600
100
CARS
MILES
MILES
OWNED.
SUBWAY-SURFACE BEGAN OPERATION-DECEMBER 1905.
-SUBWAY-ELEVATED BEGAN OPERATION-MARCH 1907.
TRACK.
UNION TRACTION CO.
PHILA. RAPID TRANSIT CO.-
AND HESTONVILLE SYSTEM.
STOTESBURY MANAGEMENT.
CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
CURVES SHOWING
MILES OF TRACK AND CARS OWNED
BY
PHILADELPHIA RAPID TRANSIT CO. SYSTEM
ALSO
POPULATION WITHIN THE CITY LIMITS
0
1880 1882 1884 1886
1888
1890
1892
1894
1896 1898 1900
1902 1904
1906 1908 1910 1912 1914
1916 1918
1920
FISCAL
YEARS
MARCH 1917
DIAGRAM NO. 8
2,100,000
1,800,000
1,500,000
1,200,000
900,000
600,000
300,000
POPULATION
IN
CITY
1.0
6.0
9.0
90,000,000.
U.T.CO.
8.0
80,00
80,000,000
7.0
70,000,000
60,000,000
PASSENGER SERVICE
5.0
TOTAL PASSENGERS per CAR MILE
2.0
3.0
CAR
JULY
IST 1907.
50,000,000
TOTAL
PASSENGERS.
4.0
40000,000
CAR MILES
30000,000
20,000,000
10,000,000
TOTAL
PASSENGERS
CONTRACT
BETWEEN
CITY
AND
EXECUTED
5¢
REVENUE
STRIKE FEB. 19th TO APR.2nd 1910.
MILES
PR.T.CO.
PASSENGER
per
CAR
KINDS
ALL
PASSENGERS
(5¢
PASSENGERS
SERVICE.
& 8¢ FARES)
CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
STOTESBURY MANAGEMENT
900,000,000.
MILE.
800,000,000
700,000,000.
600,000,000
500,000,000
400,000,000.
300,000,000
200,000,000.
Ο
1900
1901 1902
1903
1904 1905
1906
1907
1908 1909 1910 1911
1912 1913
1914 1915 1916 1917 1918
1919
1920
FISCAL YEARS
MARCH 1917.
DIAGRAM
OF
OF
OPERATING STATISTICS
PHILADELPHIA RAPID TRANSIT CO.
100,000,000
DIAGRAM NO 9
YEARLY
PASSENGERS
the company's proposal would be included in the expense of operation, and therefore
would in effect fall on the City. The operating expenses of a street railway company
should include an annual charge estimated as sufficient to provide for such replace-
ments, and this provision must be carefully examined in determining the true net
income of a street railway company.
(c) Adequacy of Service.
Standards of street railway service are becoming crystallized throughout the coun-
try and the tendency of regulatory bodies is to add service requirements. If the serv-
ice of the company is lacking in any particular, or if the regulation involving large ex-
pense is made in the future, the burden would fall upon the City under the company's
proposal.
(d) What Has Caused the Sudden Increase in the Company's Surplus?
The company, after five years of strenuous and skillful effort, has succeeded in
temporarily lifting its head above the financial quicksands in which it has been en-
gulfed, but this has only been accomplished by restricting the expansion of the system.
Diagram No. 8 shows that from the organization of the company in 1902 to the
beginning of the present management in 1911 (a period of 9 years), 186 miles of oper-
ated track were added to the system, or an average of 20 2/3 miles per year, included
in which is the Market Street Subway elevated line.
Since 1911 (a period of 6 years) but 17 miles of surface track have been added to
the system by the present management, or less than 3 miles per year.
The company's contention that it is sound financially if let alone without compe-
tition may be true, but in a city growing at the rate of nearly 30,000 inhabitants per
year, and which has already reached beyond the limits of modern surface car transpor-
tation in most directions, a company cannot be permitted to control a monopoly of
transportation unless facilities are added at a rate sufficient to meet the growth and
needs of the traffic.
The company's present earnings apparently show a surplus or profit, but this
profit results largely from abnormal business conditions and is not fortified by a his-
tory of uniform and well established earnings. As stated elsewhere, these high sur-
plus earnings are the result of:
(a) Abnormally heavy riding due to general prosperity and employment of the
citizens;
(b) Service below standard requirements, and
(c) An almost complete cessation of expansion of the system.
Diagram No. 9 shows that the car mileage operated during 1915 and 1916 was
lower than at any time since 1911, and that the number of passengers per car mile was
the highest in the company's history. This indicates that the standards of service are
not rigidly upheld.
41
What is the Difficulty Underlying the Company's Reluctance to Accept the Contract on a
Flat 5-cent Fare Basis with Universal Free Transfers?
A study of the 1916 report of the company may prove illuminating in answering
this question.
The gross passenger earnings of the company were $24,871,254.85.
The number of passengers paying fare was 481,676,000, or an average fare per
passenger of 5.18 cents.
The miscellaneous earnings were $968,088.93, or an average revenue per passenger
of 0.20 cent, making the total income of the company 5.38 cents per revenue passenger.
Of this 0.18 cent is due to the sale of exchange tickets and 0.20 cent is due to advertis-
ing, hauling freight and miscellaneous earnings.
The expenses of the company for operation, maintenance, renewals, and taxes were
$14,372,427.59, or 2.98 cents per revenue passenger.
The fixed charges, covering interest, rentals and the City's sinking fund, were $9,-
794,000, or 2.02 cents per revenue passenger, or a total for operation and fixed charges
of just 5 cents, so that the amount of $1,672,704.20, representing the surplus for the
year's operation, came from exchange tickets to the amount of about $900,000 and
miscellaneous earnings.
It is, therefore, evident that the company's claim that it is earning 8 per cent. divi-
dends on its own stock should be received with great caution and be allowed to have
little influence on the terms of the contract, as the company has in no way demon-
strated the stability of any such earnings, and every business man knows that pres-
ent day earnings cannot safely be used as a basis upon which to predict future profits
or base financing for the future.
The Company's Definition of "Deficit."
The word "deficit" as used in analysis of financial results of operation is always
understood to mean the amount which must be added to the net earnings in order to
meet all proper demands upon those earnings. It means not only an absence of sur-
plus or profits, but an actual loss in operating the property.
The word "deficit," as used in the company's proposal, applies to any shortage in
net income below the amount necessary to pay:
1. Operating expenses, maintenance, depreciation and all taxes, and licenses of
every description;
2. Fixed charges, or rentals and interest, upon the past and future bond issues,
including sinking funds;
3. A dividend of $1,500,000 to the stockholders of the Philadelphia Rapid Transit
Company.
It is thus seen that "deficit," as the company defines it, means "shortage in the funds
necessary to meet the company's requirements." The funds necessary for the City's require-
ments are not discussed in the proposal further than to provide that 90 per cent. of the sur-
42
?
plus earnings, after paying all the company's requirements and dividends, are to be paid into
the City Treasury as rental for the City's system for such application as the City may deter-
mine.
In all former reports issued by this Department, the word "deficit" has always
been understood to mean the total shortage of funds necessary to meet all charges,
including the City's interest and sinking fund.
A clear distinction should, therefore, be drawn between the company's "deficit"
and the City's "deficit."
It is certain that the operation of the unified system with the 5-cent fare that has
been promised the people will result in a huge annual deficit extending over many years.
As expressed by the company's attorney at a Public Service Commission hearing, "This
undertaking is going to cost somebody some money," and he might well have added:
our proposal intends it shall not be the company.
The Company's proposal is so drawn that the Company shall not, under any con-
tingency, bear any of the burden resulting from shortage of income. The amount to
be set aside for the Company's share is cumulative and must be paid in full before the
City can hope for any return on its investment.
The City has already arranged, in its plan for financing the construction of its
lines, to assume whatever burden shall result therefrom up to the limit of the inter-
est and sinking fund on all money which it shall furnish, and has done this in an effort
to preserve the 5-cent fare.
Under the provision of the company's proposal, this direct drain upon the City's
Treasury, based on the use of the funds now available ($63,100,000), amounts to $3,
215,000 per year, and under the full program authorized to be carried out now it
may reach $4,600,000 per year. If to this be added the abatement of the company's
payments to the City Treasury-amounting after next year to $665,000 annually-it
is seen that it may cost the City at least $3,880,000 and possibly $5,200,000 annually
to maintain the 5-cent fare with universal free transfers, but there will be no definite
assurance from the company that the free transfers will be provided.
Under the company's proposal, the company's deficits are fully protected by the
clause granting it permission without recourse to any governing body to impose a
charge for transfers to such extent as may be necessary to meet its own requirements
under the contract.
What Are the Estimated Capital Requirements of the Merged System During Period of the
Contract?
Briefly stated, the contract implies:
1. THAT THE CITY SHALL FURNISH ALL MONEY REQUIRED-
(a) For the construction of the lines now authorized by Councils, esti-
mated to cost, according to the present program of construction $83,300,000
(b) For the acquirement of all real estate and easements needed for
construction now estimated at about..
TOTAL COMMITMENT FOR THE CITY
1
1
4,000,000
$87,300,000
43
2. THAT THE COMPANY SHALL PROVIDE-
(a) All new capital necessary for the equipment for the City's lines
“if, as and when constructed," estimated during the entire con-
tract period at from___
$53,300,000 to $61,600,000
(b) All new capital needed "to meet its requirements for improvements,
betterments, refunding and other capital expenditures, in con-
nection with the present system," now estimated at from------ $43,000,000 to $56.000,000
TOTAL PROPOSED FINANCING FOR COMPANY_____ $96,300,000 to $117,600,000
TOTAL, CITY AND COMPANY....
$183,600,000 to $204,900,000
During the fifty-year period of the contract from $20,000,000, as per Estimate
"A", to $35,000,000, as per Estimate "B", must be provided by the City for additional
high-speed trackage.
The total estimated investment of capital in the transit proposition during the
next fifty years will, therefore, be about $200,000,000, or at an average rate of $4,000,-
000 per year.
On page 46 is shown the rate at which capital has been invested during the last
twenty years.
This estimate of the future capital requirements of the business makes it clear
that it is only wisdom for the City to proceed carefully in reaching a decision as to
how those requirements shall be financed and how far the City shall become involved
in the business.
It should be understood that the sinking fund provided for the City's funds and
for the company's equipment bonds will amortize a large part of this investment, but
attention should be called here to the fact that the company plans to invest capital
during the life of the contract at the rate of about $1,100,000 per year and $900,000
for its own system, or say a total of $2,000,000 per year, and even at that rate requires
the City's guarantee and help in the financing.
What Are the Company's Obligations?
Owing to lack of a definite legal statement of its obligations, it has been tacitly
assumed in the past, that by virtue of its obligations as a public utility, the company
was bound to furnish and provide "frequent, regular, reliable, speedy and comfortable
transportation to all the sections of the City within which it operated as a monopoly.”
This really, to the public, is affording adequate and proper service.
The Philadelphia Rapid Transit Company, by virtue of its charter, is authorized
to supply such transportation as may be called for by the local City ordinances under
which it operates. The charter and ordinances under which the company operates its
lines were granted before the days of the Public Service Company Law. Under that
law the Public Service Commission has broad powers to regulate and determine the
service to be furnished by the company. The company has not yet been forced by
the commission to make any extensions to its lines in order to serve the public ade-
quately. The commission has acted, however, in regard to matters relating to routing
and minor matters of service, and as this contract must necessarily receive the com-
mission's approval before it can become effective, the company's obligations, moral and
44
legal, should be definitely settled in advance in order that there may be no resulting
delay at the hands of the commission.
In its proposition, the company appears to assume that it is in no way obligated
to extend or to be financially responsible for the extension of its high-speed lines. It ad-
mits responsibility for the extension of surface lines as occasion demands or warrants.
It is a legal question as to whether or not this position in regard to the high-speed
lines can be sustained, as the company was organized primarily for the purpose of
building and operating high-speed lines and leasing and operating transit facilities,
and its first act after incorporation was to purchase the charters, rights and fran-
chises for 112 miles of high-speed track.
It may claim that its function is that of a holding company only and that it is obli-
gated to carry out only the conditions of the franchises of its leased lines. This would
be standing on a technicality, and not treating the proposition in a "fair, broad-minded
and progressive spirit."
It must
The company cannot ask to be let alone and still demand protection.
grow and expand with the City's needs, and if such expansion be beyond its financial
ability, it must readjust its finances by whatever plan is approved by the Public
Service Commission.
The company's surface lines in the central section of the city are undoubtedly
rapidly approaching, if they have not already reached, their limit of carrying capacity.
The Market Street Subway-Elevated line has afforded relief since it was placed in
operation in 1908. There is no question that the existing system requires relief in the
immediate future.
That the company expected to build additional lines is shown by the fact that in
the 1907 contract the franchise for the Frankford Elevated line was retained and an
extension of the construction period granted. It is probable that the financial condi-
tion of the company alone prevented the construction of the Frankford Elevated line.
In 1913, the Transit Commissioner recommended that, in view of the company's obli-
gations, it be given a franchise and be required to construct the Frankford Elevated
line and the Darby Elevated line as extensions of the Market Street line, but the City
was unable to induce the company to take this action.
The City's demand for high-speed facilities has now undoubtedly gone far beyond
what could be fairly interpreted as the company's ability or obligation to satisfy.
An investigation of conditions in Boston and elsewhere seems to indicate that an
average of one mile of two-track line per year is not an excessive construction require-
ment to provide for and keep pace with the City's development.
Applying this rate to Philadelphia, if we assume that the conditions in the center
of the City in 1908, when the Market Street line was placed in operation were as bad
as to-day, we would have a program of 7½ miles of double track line in a period of
ten years, or of a mile of line per year.
The company should undoubtedly be responsible for the investment of capital at
a rate sufficient to provide one mile per year of double-track rapid transit line, with
equipment, in addition to the requirements of its surface system. For any excess the
City should make provision. (See Diagram No. 11.)
45
In the Transit Commissioner's Report of 1913 (p. 97), it was estimated that the surface
car system would support an investment of about $4 of capital for $1 increase in gross earn-
ings, and the high-speed system about $7 to $1 of gross earnings. As the company's earnings
have recently averaged about $1,000,000 per year increase, this would indicate that the com-
pany should be expected to invest capital in the system at a rate not below $4,000,000 per
year and probably higher.
J
At What Rate Has the Company Supplied Capital in the Past, and at What Rate Will the
Demands of the System Require Capital in Future Years?
Diagram No. 10 shows the growth of the capitalization of the company, for which
it is directly responsible. It does not show the growth due to the absorption of lines
by lease or otherwise, but indicates the proper relation of the unpaid balance of the
Union Traction Company as a burden on the real cash which has been subsequently
invested in the system. This $19,500,000 unpaid capital is 27 per cent. on the cash
actually put into the system since the organization of the Union Traction Company.
An examination of the company's reports over a series of years shows that, be-
ginning with the organization of the Union Traction Company in 1895, cash has been
invested as follows:
Stock of the Union Traction and Philadelphia Rapid Transit Company to
the amount of about___
$40,500,000
New bonds and securities issued during that period to the amount of about 30,700,000
Total capital supplied in the 21 years from 1895 to 1916 has been about---- $71,200,000
Or at the rate per year of about..
Or, if the entire Union Traction stock be considered capital, the system
has added during this period about_---
Or at the rate per year of about.
$3,400,000
$90,700,000
$4,300,000
If we take the period from the organization of the Philadelphia Rapid Transit
Company in 1902, we shall find that during this period the company has supplied cash
as follows:
From stock, about.
From bonds, about...
Or a total of about, in a period of 14 years--
Which is approximately per year..
$30,000,000
30,000,000
$60,000,000
$4,300,000
If we take the period since the 1907 contract was executed, we find that there has
been supplied by
Calls on stocks, about__
Bonds, about
TOTAL FOR 9 YEARS___
Or about, per year..
$13,000,000
15,000,000
$28,000,000
$3,000,000
When this is considered with the operating expenses and other statistics of the
last three years, it is very plain that the present high net earnings result from the pres-
46

$65,000,000
$60,000,000
$55,000,000
$50,000,000
$45,000,000
$40,000,000
$35,000,000
$30,000,000
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
$40,000,000
BONDS
STOCK
9-6-95.
10-31-'95
5-2-'96.
3-1-97.
CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
DIAGRAM SHOWING GROWTH
OF
CAPITALIZATION
OF
PRESENT TRANSIT SYSTEMS
1895 TO 1916
CAPITALIZATION OF HESTONVILLE SYSTEM, DOYLESTOWN AND
WILLOW GROVE RAILWAY, MEDIA AND CHESTER RAILWAY,
AND CHESTER AND PHILADELPHIA RAILWAY NOT INCLUDED.
86,-91-116
7-1-02
Dates when Calls for Installments
on stock were payable,
-7-1-02.
Darby & Yeadon
42% 30 Yr. Bonds.
$200,000.
12-104
7-6-03
1-20-04
1-20-05
12-10-06
5-6-07.
9-9-07.
Par Value of Capital Stock of Union Traction and Philadelphia Rapid Transit Cos.
ALL 9-8-08
Unpaid Capital of Union Traction Co. $19,500,000
Paid in Capital Union Traction and Philadelphia Rapid Transit Cos. 40,478,875
Paid in Capital Philadelphia Rapid Transit Co. - $29,978, 875.<
Paid in Capital-Union Traction Co. $10,500,000.
1.500.000
Collateral Trust 1st Mortgage 4% 50 Year Bonds
Phila & Willow Grove 15 MTg. 4% % 50 YR. Bonds, $1,000,000.
5-1-'05.
69
Market Street Passenger Ry. Co. 1st Mortgage 4% 50 Year Bonds $10,000,000. (no sinking fund)
Union Traction Co. Operator
Philadelphia Rapid Transit Co. Operator.
Market Street Equipment Trust Certificates (Lettered E)
$325,000 Authorized.
Series A-$1,500,000 Authorized
Series B-$4,200,000 Authorized
1
3-1-12.
12-15-08
PR.T.Collateral Trust 5% Bonds $5,000,000
7-1-10.
BATCO Car Trust Certificates
APR.T. 5% SF. Bonds Dated March 1912.
Due - March 11962.-
$10,000,000 Authorized.
-Contract of July 1st 1907 between
City and Phila. Rapid Transit Co.
3-1-13.
PR.T. Car Trust.
April 1911 Stotesbury Management
Voting Trust Started.
Series A
Serves A
Series B
1,310,000
$935,000
-$200,000
$10,000,000
$4,826,000
$7,765,000
1894
1895
1896
1897
1898
1899
1900
1901
1902
1903
1904
1905
FISCAL YEARS.
1906
1907
1908
1909
1910
1911
1912
1913
1914
1915
1916
1917
MARCH 1917
$675,000
$163,000
$3,150,000
$1458000
DIAGRAM NO. 10

CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
ESTIMATED INVESTMENT OF CAPITAL
IN UNIFIED SYSTEM FROM 1895 TO 1967
AND PORTIONS OF CAPITAL SUPPORTED BY
EARNINGS OF THE SYSTEM, ABATEMENTS,
CHARGE FOR TRANSFERS AND CITY TAXES,
UNDER TERMS OF
PHILADELPHIA RAPID TRANSIT CO.'S PROPOSAL OF
DECEMBER 20, 1916,
(6)
ALSO NORMAL CAPITAL REQUIREMENTS
OF UNIFIED SYSTEM
LEGEND
Capital Supported by Estimated Earnings of System.
now due City under 1907 Contract.
of Payments
(c) Additional City Bonds that could be supported by the 10% of Net Surplus
of System retained by Company under terms of Proposal.
CARRIED BY EARNINGS OF SYSTEM
154 FARE AFTER 1917)
NOT CARRIED BY EARNINGS OF SYSTEM
(5 FARE AFTER 1917)
OO
$260,000,000
$240.000000
$220,000,000
$200,000,000
$180,000000
$160,000,000
$140,000,000
$120,000,000
$100000000
$80,000,000
$60,000,000
$40,000,000
$20,000,000
D
1895
-ACTUAL
ESTIMATED
C
B
City Bonds carried by Taxes
REQUIREMENTS OF SYSTEM ($4000.000 PER YEAR ESTIMATED)
CAPITAL
P.R.T.Capitalization not carried by
Company's Earnings
PRT.CaStock supported by Charge
for Transfers
ments to City now due under 1907 Contract
PRC Stock supported by bbatement of Pay
A
City Bonds supported by share of net surplus of Unified System
CITY BONDS ISSUED
FOR CONSTRUCTION
OF HIGH SPEED
LINES
NORMAL
1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1967
FISCAL YEARS
CAPITAL STOCK OF
PHILA. RAPID TRAN-
SIT CO. $30,000,000
NEW CAPITAL INVES-
TED IN COMPANY'S SYS
TEM DURING TERM OF
PROPOSED CONTRACT
UNION TRACTION CO'S.
STOCK, AND OBLIGA-
TIONS ASSUMED
SINCE 1895.
COMPANY'S INVEST-
MENT IN EQUIPMENT
OF CITY BUILT LINES
MARCH 1917
ent policy of the company to work the existing tracks to a higher load factor than has
been the custom in the past.
The high expenditures between 1902 and 1907, amounting to about $32,000,000 in
the five-year period, or about $6,400,000 a year, was largely due to the construction
of the only high-speed line which the company owns the Market Street Elevated
line.
During the period from 1857 (when the first horse car lines were chartered) to
1895 (the time of organization of the Union Traction Company), a period of nearly
forty years, a considerable amount of capital was invested in the system. The amount
can only be approximately ascertained, but may be assumed to have been at least $60,-
000,000, or about $1,500,000 per year.
It will thus be seen that the annual capital requirements to provide for the ex-
pansion of the passenger railway system in order to properly take care of the City's
needs and growth, has varied in the past sixty years, since the system started from $1,-
500,000 per year during the horse-car period, to about $5,600,000 per year at different
periods since, and has averaged at least $2,000,000 per year for the sixty years that the
system has been in existence.
All this capital has been invested up to the present time without any direct as-
sistance from the municipality and without any guarantee by the City on the funds
invested in the property.
It being admitted that a system of this kind must grow with the City in order to
provide proper facilities, and it having been demonstrated that the requirements have
varied in the recent past years from $3,500,000 to $4,500,000 annually, it is reasonable
to estimate the future requirements at about $4,000,000 annually, as is shown else-
where.
The estimated investment of capital in the unified system from 1895 to 1967, and
the portions by earnings of the system, abatements, charge for transfers and by City
taxes, under the terms of the company's present proposal are shown on Diagram No. 11.
Extension of the Present System.
The Company's proposition in regard to new lines and extensions of lines in the
existing system is vague and indefinite.
The City's main object in desiring a contract with the existing company was to
obtain the use not only of the existing lines, but also of a number of additional sur-
face lines as feeders, which would thereby spread the effect and distribute the advan-
tages of the high-speed service over practically the entire City.
In order to accomplish this, in the original report of the Transit Commissioner,
and in all subsequent reports and maps, a large number of additional lines has been
assumed to be a part of the undertaking; for instance, the Chew Street line in Ger-
mantown; the extension of Fifth Street north into Oak Lane; the continuation of
Ninth Street north above Allegheny Avenue, and other lines which have been prom-
ised to the public by the company.
A tabulation of these lines, as given in the previous reports of the Department,
and estimates of their cost without equipment, is given herewith:
47
NEW SURFACE LINES INSIDE CITY LIMITS
See Frontispiece, 1915 Annual Report of Department of City Transit.
Approxi-
mate
Miles of
Street
Approxi-
mate
Miles of
Single
Track
Approximate
Cost of
Construc-
tion at
$42,500
per Mile
NINTH STREET-from Northeast Boulevard to Olney Ave...
FIFTH STREET-from Olney Ave. to Oak Lane….
CHEW STREET-from Chelten Ave. to Mt. Airy Ave.-
STENTON AVENUE-from Chew St. to Cresheim Ave....
WALNUT LANE-from Ridge Ave. to Cliveden St. to Wayne
Ave.
1 3/8
2 3/4
$117,000
1 7/8
3 3/4
160,000
17,8
3
3 3/4
160,000
6
255,000
1 3/10
2 3/5
110,000
FIFTY-SIXTH STREET-from Lancaster Ave. to Woodland
Ave.
3 1/2
7
300,000
FORTY-SIXTH STREET-from Lancaster Ave. to Woodland
Ave.
SIXTY-FIFTH STREET-from Kingsessing Ave. to Woodland
Ave.
ERIE AVENUE-from Sixteenth St. to Twenty-second St.--.
ERIE AVENUE AND TORRESDALE AVENUE-from Second
St. and Erie Ave. to Torresdale Ave. and Margaret St.---
CAYUGA STAND, NORTHEAST BOULEVARD-from Ger-
mantown Ave. to Ninth St.
OREGON AVENUE-Crosstown Line
SIXTY-THIRD STREET-from Woodland Ave. to Passyunk
Ave.
1 1/2
3
127,000
1/4
1/2
21,000
1/4
3/4
32,000
3
6
255,000
1
2
85,000
3 1/4
6 1/2
276,000
1 1/8
2 1/4
96,000
OGONTZ AVENUE-from Olney Ave. to Limekiln Pike___.
ALLEGHENY AVENUE-from Seventeenth St. to Twenty-
second St.
5/8
1 1/4
53,000
1/2
1
42,500
HOYT STREET-from Delaware Ave. to Schuylkill River-----
3 5/8
7 1/4
308,000
28
56 4/10
$2,397,500
The contract, however, is absolutely silent as to specific designation of those ad-
ditional lines which form an integral part of the City's program. The provisions for
surface extensions in general are extremely faulty. In Article XXVIII, Paragraph 4,
it is provided that the City shall have the right to require the lessee to provide such
surface extensions as the Public Service Commission shall determine to be reason-
ably remunerative to the lessee. Considering the proposed distribution of net earn
ings such extensions could be in nowise remunerative to the lessee.
In Article VI, it is provided that the City may build surface lines and lease them
to the company, but, as explained in the report of the consulting engineers, the con-
ditions under which this may be done are such that they are practically impossible
of fulfillment. Therefore, as the contract reads, it would be practically impossible to
procure all such new extensions.
Besides definitely assuring the City all the required surface extensions within its
borders, provision should be made for the extension of lines outside of the City, as
the future development of the City in the next fifty years will require many additional
48
lines before the expiration of the lease. The City, before that date, will overflow its
borders, and even now the annexation of parts of Delaware County is being discussed.
The development which is now taking place and which will increase rapidly along
the southwestern river front will call for an extensive expansion of lines into that dis-
trict, and provision should be made in the contract for building such lines.
While the City should not expect to stand godfather to a large amount of pio-
neer work, neither should the company be permitted to take on additional leases of
lines in this and adjoining counties which are liable to prove burdensome to the ex-
isting system. This is a point which should be carefully guarded in the lease as legiti-
mate expansion is to be encouraged, but the promotion of lines for real estate develop-
ment and for stock jobbing purposes should not be in any way encouraged.
Sinking Fund and Amortization of Capital.
In all forms of public utility business it is essential to provide for obsolescence
which is the supersession of property by developments which improve the efficiency or
reliability of apparatus, or which cater or appeal to the comfort or convenience of
the public. This is distinct from supersession of plant due to growth of business,
causing a lack of capacity. In many cases the increase in efficiency of improved and
more modern apparatus warrants the discarding of old, but in such cases the resulting
increase of profits from the operation of the new construction or equipment should be
used to amortize the additional investment within a period less than the estimated use-
ful life of the new apparatus.
A private corporation is not necessarily bound to this method of financing im-
provements, and many public utility companies have disregarded it in the past.
The attorney for the Philadelphia Rapid Transit Company recently stated that he
did not think any money invested in a public utility should ever be amortized. This
statement is consistent with the past practice of the company, as an examination of
the company's finances shows that probably $40,000,000-being practically all funds
invested in the company prior to 1903-is now dead capital, chiefly representing origi-
nal perpetual franchises and superseded property, such as horse and cable cars. Little
real property remains tangible, and practically nothing which is used in the present
service.
It may be a debatable question as to whether public utility companies should be
compelled by law to amortize the cost of improvements and thus conform to the prac-
tice imposed by law on cities, but this Department believes that in a contract such
as is now contemplated, covering property which is to pass eventually into the City's
ownership and control, it should be provided that all new capital at least should not
be of a permanent character. This question of amortization is a vital one where the
joint use of public money is concerned.
The plan which has just been issued for a comprehensive transit development in
Chicago provides:
"The amortization funds to be provided whereby the outstanding valuation
or purchase price shall be progressively reduced, these amortization funds to
4
49
be increased by all remainders of the traction fund, over requirements for new
construction."
"A reasonable forecast of the results obtained under this financial plan indi-
cates that by 1937, or at the end of twenty years, there will have been amortized ac-
tually or in effect nearly $120,000,000, or 30 per cent. of the then total capital in-
vestment in the combined properties."
Under Article XXIII of the proposal it is stated that the lessee "will undertake
to obtain from time to time sufficient new capital to meet its requirements for addi-
tions, betterments, refunding and other proper capital expenditures, and the method
of securing said capital shall be governed by the provisions of Section 1 of the 1907
contract." Section 1 of the 1907 contract provides: "No further increase of capital
stock or funded indebtedness shall be made by the company, or any of its subsidiary
companies, at any time, or for any purpose, without the consent of the City." Nowhere
in this article is there any intimation that these bonds are to carry a sinking fund,
although this is absolutely necessary, unless such capital is to become permanent.
Such sinking funds would, under the proposed contract, be paid out of the City's
share, and, unless it is specifically provided to the contrary, it would increase the com-
pany's equity in the property. This point should be guarded and made clear that any
amortization fund on these bonds should be for the benefit of the City.
Diagram No. 12, based on the "A" estimate of the Ford, Bacon & Davis report,
shows the effect of the sinking funds which are provided for under this draft and the
City's program, and also shows that of the $204,000,000 of new capital required by the
system during the term of the contract, $127,000,000, or about 62 per cent. will be
amortized, in addition to which $26,250,000 of the $30,000,000 capital stock of the
Philadelphia Rapid Transit Company should be amortized.
The Ownership of and Title to the Equipment of the City's Lines, which is to be Supplied by
the Lessee.
In the opinion of the Consulting Engineers as expressed in their report, the refer-
ences in the proposal to the title, amortization fund and payments for equipment are
so drawn that if the City should purchase the equipment at the end of the contract it
would virtually have paid double for that amount covered by the equipment sinking
fund. It is unthinkable that the company deliberately plans to draw the City into any
such agreement. This is one of many evidences that the City's interests need to be
carefully guarded in such a contract.
In this important particular, involving large sums of money, the phraseology
should be unequivocally clear and thoroughly consistent.
The Fare.
Paragraph 7, Article 19, Section D, is the most vital clause in the contract, be-
cause it determines the gross income of the merged system. The care with which it
has been prepared again emphasizes the correctness of the position which was taken
50

MILLIONS OF
DOLLARS
400
350
300
CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
DIAGRAM OF ESTIMATED INVESTMENT
AND REVENUE OF
COMPLETE UNIFIED SYSTEM
AUTHORIZED BY
ORDINANCE APPROVED JULY 20, 1916
OPERATION BY
PHILADELPHIA RAPID TRANSIT COMPANY
WITH UNIVERSAL FREE TRANSFERS
ESTIMATE A
250
200
ACTUAL
150
100
50
1907 CONTRACT
ESTIMATED
TOTAL CAPHALIZATION (PAR VAL
E
UNPAID CAPITAL
PORTION AMORTIZED BY
OPERATION OF SINKING FUND
ASH INVE
TMENT REPRESENTED BY STOCKS AND BONDS
CITY BONDS
STOCKS AND BONDS OF PRIFCO AN
UNDERLYING COMPANIES
TOTAL CASH INVE
AMORTIZATION FUND
FOR EQUIPMENT
UNPAID CAPITAL
COMPANY'S BONDS FOR EQUIPMENT
LOF CITY BUILT LINES
COMPANY'S
NEW BONDS
COMPANY'S BONDS FOR
EXTENSION OF PRESENT SYSTEM
BONDS OF PR.T. CO. AND
UNDERLYING COMPANIES
AS OF JUNE 30,1916
TOTAL CASH INVESTMENT REPRESENTED BY STOCKS OF PRT.CO. AND UNDERLYING COMPANIES
INKINI
SINKING FUND
CITY CONTRACT
GROSS REVENUE ESTIMATE A
GROSS REVENUE IN PERCENT OF CASH INVESTMENT
1895
1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
YEARS
END OF PROPOSED CONTRACT
30%
20%
10%
1970
MARCH 1917.
DIAGRAM NO. 12
in the report of the Department of March 29, 1916, in which it was emphatically
stated:
*
"The entire transportation problem of the City contains but two fundamental elements
-service and care fare-what kind of service do the people want, and how much are they
willing to pay for it? ** As the quality and amount of service rendered by a system
must be a large factor in determining the car fare, it may be said that the control and solu-
tion of the entire problem centers in the fare."
The City, by Section 8 of the contract of 1907, confirmed all the rights, titles
and franchises of the underlying companies, but a close reading of this section makes
it clear that these rights are only confirmed subject to the two important provisions:
1. That the present rates of fare may be changed only with the consent of both
parties.
2.
That the contract should not be construed to limit the power of the City to
make rules and regulations relating to the management and operation of the lines as
necessary under the police power.
The company, by this new contract, seeks to amend and practically annul the first
provision. There has never been any judicial interpretation as to how far under
the police power the City can demand that the company provide additional service
such as is now contemplated. The City should give serious consideration to this clause
before it agrees to the company's present proposal, as it distinctly specifies that the
1907 contract is to be amended only as set forth in Section E in its proposal.
If the City accepts the provision of Paragraph 7 of Article 19, Section D, it must
be assumed that it thereby admits that the contract of 1907 permits the company to
make a charge for transfers at its own option, and thereby strengthens the company's
contention that the charge of 3 cents for certain transfers now made is proper and
within their legal rights. This provision represents one of the company's efforts to
protect and guard its 5 per cent, dividend against future contingencies, which are in-
evitable in a business of this kind.
The company has itself presented no brief in justification for the change in the
wording of this clause from the City's proposition, which provided unequivocally for
that which the people have been promised and led to expect, namely:
A flat 5-cent fare, with universal free transfers between any two points reached by the
unified system within the City limits.
As this clause is worded by the company, it apparently makes no provision for
additional fares on the lines outside of the City limits.
It has been stated by the company's advocates that no change in fare is contem-
plated, except in case of a "remote contingency, such as war, pestilence, conflagration,
earthquake or a tremendous inflation of operating costs.” If the company actually
believes that such is the case, why does the company not propose to accept the City's
condition of a flat 5-cent fare, with the provision that in case of a remote contingency,
or, as the lawyers call it, a vis major, or an act of God, should occur, they should be
permitted to adjust the rate of fare along a method satisfactory to the Public Service
Commission?
51
It will be noted that while the company is given the right to increase the fares
automatically, the City is only given the right by appeal to the Public Service Com-
mission.
It is further significant that among the remote contingencies is included "unexpected
inflation of operating costs," which this Department regards not as an "improbable contin-
gency," but an ordinary hazard of the undertaking.
That the change of fare is not a remote contingency to be lightly regarded, but
that there is every probability of its being a reality in 1922, is shown by the diagram
accompanying the report of Ford, Bacon & Davis, the Consulting Engineers (see Ap-
pendix A).
The company is probably assuming that as no change in fares will take place
immediately, it is therefore to be considered as remote and that the contingency fea-
ture will be forgotten by the time a charge for transfers becomes necessary.
The desire seems to be to lull the public mind into a false sense of security by the
proposition that the operation of the system shall start on a 5-cent basis even though
the company is not obligated to maintain this rate for any definite period.
An especially unfair feature of the proposal consists in giving the company abso-
lute control not only over the amount of the fare adjustment, but over the method in
which the charge for transfers is to be applied-all for the purpose of protecting the
company's cumulative dividend of $1,500,000 per year. That it is unfair to permit
the company this privilege is shown by the fact that although the company proposes
to be relieved of the paving payments and dividend taxes amounting next year to $665,-
000, as compensation for the abolition of exchange tickets, the company is to be per-
mitted to retain a part at least of the exchange tickets, and permitted to restore
them in whatever way it sees fit at a later date if it needs money for dividends on
its own stock.
It will thus be seen that one of the items of the proposed contract tending to
obviate or delay the rise in fare is that the City Treasury shall assist the company's
treasury by contributing $665,000 and upwards per year as above and for five years
loaning $120,000 in effect without interest by postponing the company's payments into
the City's special sinking fund. In other words, to assist the company in protecting its
dividend, the City must forego, as a first step, the equivalent of interest and sinking
fund on over $13,000,000 of its bonds. The next step is the charge for transfers if
sufficient net revenue for the dividend is not otherwise obtained.
If any change of fare is to result from the City's program, it should be thor-
oughly discussed publicly. The attitude of the public is very important, and it must
not be overlooked that radical changes of fare have in the past furnished the oppor-
tunity for widespread dissatisfaction with the company's management and usually cul-
minated in severe strikes; thus the strike of 1896 followed the establishment of the
S-cent exchanges, and the strike of 1910 resulted indirectly from the withdrawal of
strip tickets. Under this proposal the City must really bear the burden of any ex-
pense from such cause unless the Contingency Fund should be sufficient.
The Department is opposed to the company's plan of fare adjustment, as it is devised
only for the company's dividend protection and provides no revenue whatever for the City.
52
This dividend, the Department holds, should not be guaranteed or cumulative, and, as stated
elsewhere, the compensation for the abolition of exchange tickets should not be agreed to
by the City until these tickets are declared to be a legal rate of fare under the 1907 contract,
and only then if the abolition is to be permanent.
Under the terms of the proposal, if the City should find it necessary to raise the
fare for its own benefit, the company would secure 10 per cent. of such rise in the divi-
sion of net income. Even if legal, it is unjust for the Company to demand a fee of 10
per cent. for collecting any tax on the riders which the City may impose for the City's
benefit.
Effect of a Charge for Transfers.
There are three ways in which transfers may be used under this proposed plan:
Between surface lines.
1.
2. Between high-speed lines.
3. Between surface and high-speed lines.
Although the proposal leaves both the amount of the charge and the method of
its application to the company's pleasure and good judgment, officials of the company
are reported to have stated that only the third method is contemplated. Such a plan
would affect the existing system principally at Juniper and Market Streets and in
West Philadelphia.
The immediate effect of a charge for transfers is to cut down the use of transfers
appreciably. Unofficial figures seem to indicate that a 1-cent charge may reduce it in
amount 15 per cent. or more.
The report of Ford, Bacon and Davis furnishes estimates of the probable results
of charging for transfers at varying rates.
Abatement of Taxes and Franchise Payments.
The company's demand that it shall be relieved from all taxes and franchises and
license payments within the City's jurisdiction during the term of this lease is some-
thing which should be given careful consideration.
The following letter from Mr. George E. Datesman, Director of the Department
of Public Works, calls attention to the effect on the City Treasury, and his Depart-
ment, of abating the payments due the City by the company under the 1907 contract:
DEPARTMENT OF PUBLIC WORKS
OFFICE OF THE DIRECTOR
CITY HALL, PHILADELPHIA
HON. THOMAS B. SMITH,
"
JANUARY 4, 1917.
Mayor of Philadelphia.
DEAR SIR: In connection with the proposed agreement of the Philadelphia
Rapid Transit Company, with reference to operating the City-built subway, I beg
53
to call your attention to the amount of payments which will become due from the
Philadelphia Rapid Transit Company from January 1, 1917, to the end of the
lease, fifty years, from July 1, 1907.
January 1, 1917, to July 1,
July 1, 1917, to July 1, 1927
July 1, 1927, to July 1, 1937
July 1, 1937, to July 1, 1947
July 1, 1947, to July 1, 1957
1917 (1 year @ $500,000).
(10 years @ $550,000)
(10 years @ $600,000)
(10 years @ $650,000).
(10 years @ $700,000)..
$250,000
5,500,000
6,000,000
6,500,000
7,000,000
$25,250,000
You will note that this amount would be more than sufficient to equip and
operate all of the lines.
As soon as these payments cease, it will be necessary for the City from gen-
eral funds to appropriate equivalent sums which, in themselves, are insufficient
to keep the pavements of the City in proper condition-it means to the City pay-
ing for the free transfers from general taxation.
Yours very truly,
(Signed) GEO. E. DATESMAN,
Director.
In regard to this letter, it might be well to state that the contract of 1907 pro-
vides, in addition to the base payments which the Director has used in his estimate,
that certain payments for additional mileage shall be made, and if to the figures named
in this letter be added the additional amount which is due to the surrender of the
tax on dividends, the total amount by which the Company is relieved during the period
is estimated to be over $43,000,000 in place of $25,000,000, as named in his letter.
Although the cost of the original equipment of the City's system is estimated at
$17,000,000, the entire investment by the Company in the equipment of the City's lines
during the lease period is estimated to be between $50,000,000 and $60,000,000.
It is true that after the Company's dividends are earned, this abatement comes back
to the City less the Company's toll of 10 per cent. However, at a time when the City
will have need of every dollar it can raise, it is asked to contribute this money to
guarantee or pay the dividends of the Company. By the estimates contained in the re-
port of the consulting engineers, an amount of as much as $11,000,000 of this abate-
ment might be necessary to sustain the Company's dividend; $3,300,000 might be re-
tained by the Company under its deduction of 10 per cent. of net income, and only
$29,500,000 might come back to the City. The maximum drain on the City will come
in the time of its greatest stress.
Franchise-Term of.
The term of the lease contemplated in all negotiations and proposals has been fifty
years, that being the specified term of the 1907 Contract.
It is proposed to extend the 1907 Contract by the period that has already expired,
namely, ten years, making the 1907 Contract co-terminous with the lease of the new
lines.
54
It is exceedingly doubtful whether in a proposition of this kind, the time limit
should be absolutely fixed. There are many objections to both the short term and the
long term franchise. The indeterminate franchise seems to be the most desirable
form. It has been adopted in most of the contracts drawn within recent years in other
cities, and this Department unhesitatingly recommends that such a provision be in-
corporated in any contract for Philadelphia.
Long before the expiration of a 50-year lease some of the lines now authorized will
have reached the limit of their capacity and the City will face the necessity of further
construction.
When one reflects that the whole street railway business in Philadelphia is but
sixty years old, and the electric railway business only about twenty-five years old, it will
be appreciated that a 50-year contract will see many changes and developments not
now foreseen or contemplated. Hence the great desirability for an indeterminate
franchise which can be recalled at any time, upon terms specified in the instrument,
when it becomes unsuitable and no longer fits the conditions then existing.
As stated by Samuel Insull in testimony before Chicago City Councils, January
22, 1917:
"In order to raise this money a basis of financing must be provided by which
it can be secured cheap. The investment must eventually come out of the pockets
of the people who ride, and it is to the City's advantage to devise the most economi-
cal way of financing the work. The terminable franchise is best suited for this."
The following discussion of franchises, taken from "Municipal Franchises," by
Delos F. Wilcox, sets forth clearly the merits of the indeterminate franchise:
"One of the most important conditions attaching to any franchise is the per-
iod for which it is to run. During the years when neglect of the public interests
in franchise negotiations was more the rule than the exception, a great many cities
granted perpetual franchises. This policy has now been discontinued in most
states and cities. There are few students of public utility questions outside of
those who may have a direct financial interest in the companies who would now
claim that perpetual franchises for the use of the streets are in accordance with
enlightened principles of government. In fact, it is almost unthinkable to a citi-
zen of the twentieth century that special privileges in the streets of a city, granted
now or in the past, should last forever. Even where franchises do not expire by
limitation and are not revocable, the right of the State to acquire them by con-
demnation proceedings is coming to be generally recognized. It is quite abhor-
rent to a sense of public justice that a franchise once granted as a free gift should
not be subject to resumption without the payment of great sums of money on ac-
count of the termination of the franchise right. But it is not necessary to dis-
cuss at length the merits of perpetual franchises. They lie outside the pale of
reasonable controversy.
"If we put together the principle that a public utility should be continuously
and symmetrically developed to meet the needs of a growing community and the
other principle that the street railway is a public business in which capital should
be guaranteed a limited risk and should be satisfied with a limited profit, we may
arrive at the right theory of franchises as far as the question of duration is con-
cerned. The City cannot properly fulfill its function unless it maintains a con-
55
tinuous control over the several uses of the street. It must have the power at any
time to change or improve any public street, and to readjust the locations and the
relations of the public utility fixtures on, above or below the surface of the street.
Moreover, inasmuch as the street railway business is a public function the City
must remain in a position where in the event that this function is not being ade-
quately performed, it can either resume it or transfer it to another agent. For
these reasons it is an essential feature of a good street railway franchise that the
City should have the right to terminate it any time or at certain short term inter-
vals upon giving not more than one year's notice. On the other hand, the protec-
tion of the investors who have furnished the money to construct the plant neces-
sary for the performance of this public function, requires that in case a company's
franchise is terminated the property should be purchased by the City or by its
licensee. Under such a provision it will be safe for investors at any time to supply
the capital for the construction, extension and improvement of a street railway
system, as they will know that whatever construction expenditures are made in
good faith and with good sense, will be returned to them if they are not per-
mitted to continue the operation of the system indefinitely.
"Every street railway franchise, therefore, should be indeterminate, with the
proviso that a shifting of tracks or even a substitution of routes more advantage-
ous to the public may be required at any time at the expense of the company, but
that if the franchise is revoked the entire physical property shall be purchased
either by the City or by another company authorized by the City to take it over
and operate it."
Right to Recapture.
Under Section D, Article 18, Clause 6, it is provided as a right reserved to the
City that the City may, at any time during the term of the contract, upon giving the
lessee six months' notice of its intention so to do, recapture its own property and
acquire all of the lessee's property by paying to the lessee an amount equal to the
amount which has been paid upon all of its capital stock outstanding at the time of
the purchase and recapture, together with all the dividends accumulated under the
provisions of this contract then unpaid.
This is practically an agreement that the City may buy the Philadelphia Rapid
Transit Company's stock at any time upon six months' notice at par and accrued divi-
dends.
There are two difficulties, however, in the way of this being carried out:
1. The company's by-laws and the conditions under which its stock is issued do
not permit of calling its stock on such terms.
2. The second difficulty lies in the fact that without additional legislation it is
doubtful if the City will, for many years, have sufficient reserve or borrowing capacity
to enable it to avail itself of this recapture clause.
This clause does not give the City the right apparently to call shares at its op-
tion at par on six months' notice for the purpose of investing the funds accumulated
in the special City sinking fund in the stock of the company.
56
The contract does not give the City the right to recapture its own high-speed lines
without buying the capital stock of the Philadelphia Rapid Transit Company, and
assuming its entire fixed charges.
Such a purchase, however, might be complicated by an unfavorable interpreta-
tion of certain passages in the proposed contract. The City must pay "An amount
equal to the amount which has been paid in upon all of its capital stock outstanding
at the time of the purchase and recapture, together with all dividends cumulative un-
der the provisions of this contract and then unpaid."
Under the provisions of this contract the term of the 1907 contract is extended so
that the two contracts will be co-terminous; therefore, the accumulation of unpaid
dividends under the 1907 contract would come "under the provisions of this con-
tract."
In the amendments to the 1907 contract now proposed, the company agrees to
give up "all right or claim to make distribution of dividends on its paid-in capital
stock for the period July 1, 1907, to June 30, 1916.”
These accumulated dividends amount, in round figures, to $15,000,000.
By this the company gives up the right to distribute these dividends while the
contract is in force, but does not waive its rights to consider the accumulation of
such dividends as an asset or an obligation on the part of the City to the company
as distinct from the stockholders of the company.
These dividends from July 1, 1907, to June 30, 1916, are, therefore, "accumu-
lated” and “unpaid" and thus might be considered payable by the City to the com-
pany in case of purchase by the City. This payment having been made into the treas-
ury of the company and the contract terminated, the funds might be distributed to
the stockholders.
What does the City Secure if and when it Purchases the Philadelphia Rapid Transit Com-
pany's Stock at the Expiration of the Lease?
In the first place, the Philadelphia Rapid Transit Company is a holding and op-
erating company, having little or no property of its own, but holding other properties
under lease or by stock ownership, and operating under their original franchises.
An examination of the books of the Philadelphia Rapid Transit Company in 1910,
after the stock had been full paid as required by the contract of 1907 shows that a
large part of the $30,000,000 contributed by the Philadelphia stockholders, and for
which they are to be reimbursed, has been invested in the stocks of the underlying
companies, or has been advanced under the terms of leases to underlying companies.
for long periods without interest. At present the company has hypothecated all stock
owned by it and everything else of value as security for loans issued during recent
years. Its stock to-day represents little, except the value of the leaseholds.
The stock of the Philadelphia Rapid Transit Company carries with it a large num-
ber of leaseholds and a large amount of financial obligations. The principal lease-
holds consist of:
57
(a) Lease of the Union Traction Company system.
(b) Lease of the Market Street Elevated Passenger Railway Company.
(c) Lease of the Darby, Media and Chester Railway.
(d)
@ @
Lease of the Doylestown and Willow Grove Railway.
(e) Lease of other subsidiary companies.
The company's equity in its leaseholds is subject to all its own bonds now in ex-
istence or authorized in the future.
By purchasing the Philadelphia Rapid Transit Company's stock the City would
inherit the lease of the Union Traction Company, and would become obligated to pay
that company the rental called for by that lease.
The real equity of the Philadelphia Rapid Transit Company in the existing sys-
tem will be determined very largely not by the intrinsic value of its property, but on
the capitalized value of this contract which it is trying to make with the City.
If it can make a contract with the City, by which it can relieve itself of some of
the hazards under its present contracts and leaseholds, the stock should become
much more valuable. Should the City insist upon the company fulfilling its obliga-
tions, the stock would be of comparatively little value. The money which has been ad-
vanced by the Philadelphia Rapid Transit Company under the terms of its leases to
underlying companies only serves to complicate the situation.
It is the intention of this paragraph to show that the value of the Philadelphia
Rapid Transit Company stock is determined solely by the amount of earnings appli-
cable to that stock, and as the amount of such earnings can be regulated by the City
and the Public Service Commission, the real value of this stock is problematical. Hence
the company's endeavor to give it a fixed value by fixing the return so that it shall be
beyond the power of the City or Public Service Commission to control the relation be-
tween the company's profits and its fulfillment of its obligations as to service.
Results to City from Operation of Sinking Funds.
Under the 1907 contract, which, as modified, would expire on the same date
as the one now proposed, the City is expected to take over the Rapid Transit Com-
pany, and for this purpose may use the accumulations of the special sinking fund pro-
vided under the contract of 1907 for that purpose.
4
This sinking fund, with interest compounded at the rate of 33 per cent. per an-
num, should amount at the expiration of the lease (1967) to about $26,000,000. There-
fore, the City at that time, by the payment of $4,000,000 or more in addition, can buy
the capital stock of the company if it has not been increased, and thus secure both its
own system and the company's system, as they stand at that time, subject to all the
indebtedness, leaseholds and current obligations then existing.
The City should get the benefit of the sinking fund for the equipment of its
system. There is no apparent reason why the City should pay or assume obligations
for the cost of the equipment operated on its lines at the expiration of the lease, any
58
amount except the unamortized portion of the cost. The 1 per cent. provided for the
amortization of equipment under Article XIX should pay all the cost of the original
equipment and a large part of the cost of the equipment subsequently purchased, so
that the unamortized portion should not exceed 30 per cent. of the total cost.
The company must surely have overlooked this provision for the amortization of
the equipment out of the earnings, as it is manifestly unfair to expect the City to
pay the company at the expiration of the lease for the amortized portion of the in-
vestment. It is assumed that such payment is not intended, but this should be made
clear beyond question. The report of Ford, Bacon & Davis discusses this feature of
the company's draft.
By the operation of the 1 per cent. sinking fund, applied to its own bonds is-
sued for construction, the City will have amortized these bonds, and, therefore, should
own the original City-built subways and elevated structures free of any liens and en-
cumbrances, excepting accrued depreciation with later construction partly paid for.
The Control and Management of the Proposed Merged Transit System.
A fundamental feature of the company's proposal lies in the tacit admission that
the company has reached the limit of private financing and that the City must enter
the transportation field as a partner, putting into the partnership the greater part
of the fresh capital which will be needed for the next fifty years and guaranteeing such
funds as are raised by the other partner.
Furthermore, the contract provides that all extensions of lines and improvements
of service are at the City's direction, thereby putting the responsibility for the quality
of service and the responsibility for the operating surplus up to the City. The City
is thereby made to act in the dual capacity of a special partner in the business and at
the same time a regulator of that business.
The broad principle involved is stated by Mr. Arthur Williams in the Electrical
World, of February 3, 1916, as follows:
"Shall the Government go into business, which means all business; or shall we stick to
the business of Government, through which business shall be regulated?"
It was decided by the Gas Lease of 1897 that the City should divorce itself from the
business end of the proposition and have no part in the management of the leasing
corporation beyond the functions of regulation as definitely specified in the lease.
Ten years later, in 1907, however, in the contract drawn up between the City and
the Philadelphia Rapid Transit Company, it is stated that "It is considered desirable
that the City shall have a voice in the management of the affairs of the company, but
no responsibility therefor, and in no sense shall the City be considered as partner of
the Company"-but that it is considered so to be by the public is shown by the fre-
quent reference to this relationship in public prints.
Ten years more have now passed and the present proposal goes several steps further
in the direction of involving the City in a direct business proposition.
59
It is provided in the contract as proposed by the Company that the City and
the State shall have power to supervise and regulate the future financing and service
to be rendered. The City's power, as outlined, appears to be largely the veto power,
and the appeal from the City's veto power is to a Board of Arbitration.
It is very
questionable whether this merged system can be satisfactorily operated on the plan
proposed.
Furthermore, by virtue of the contract of 1907, the company is to have eight mem-
bers on the Board of Directors of the company, the entire control of the Executive
Committee and the management.
The City's large interest, representing fully one-third of the total value of the
merged system or 90 per cent. of the variable income, is to be represented by a minority
of three directors in the Board who are assumed, under the terms of the 1907 con-
tract, not to be "troublesome" members, as one object of that contract was to obtain
the good will of the public and freedom from criticism of its management, etc.
In addition to the three members of the Board of Directors certain functions of
control as outlined in this contract are to be exercised by the Director of the Depart-
ment of City Transit; other functions by the Councils of the City; other functions
by the Public Service Commission; other functions by the City Controller and City
Solicitor. The control of funds is also complicated-City sinking funds are to be con-
trolled by a Sinking Fund Commission; Equipment Sinking Fund by the Trustee under
the mortgage; depreciation and other reserve funds by a Reserve Fund Board; then a
Board of Arbitration is provided for disputed points under either this contract or the
1907 contract. It is doubtful if a more unsatisfactory and tangled method of control
could be devised.
The City is endeavoring in this contract to secure first-class service, but under this pro-
posed contract it will be almost impossible to secure it, and equally impossible to locate the
responsibility for delinquencies.
It must not be overlooked, nor the effect minimized that a combination of the kind that
is contemplated by this lease is a combination of a business organization with a branch of
government, and there will be a constant struggle between these two elements, whether the
government shall regulate the corporation or whether the corporation shall regulate the
City's affairs.
That this is no idle fear is shown by the study of the Cleveland situation, which
after years of agitation resulted in the famous contract of 1910. This contract has
been a matter of more or less friction between the company and the City government
ever since it was signed.
Service Specifications.
Are the service specifications of the proposal satisfactory, and is proper control
of service reserved to the City?
The ultimate control of service lies in the Public Service Commission of the State
of Pennsylvania, but as the City is spending a large sum of money to secure improved
local railway transportation, it should reserve, insofar as the operating company is
60
concerned, entire control over the quality of service. The company's proposal is not,
to a proper degree, explicit in this particular.
Under the heading of "Operating Schedules" it is specified that "the headway be-
tween trains at each period of the day shall be as near as possible in proportion to
the traffic." This provision, if interpreted literally, would result in very poor service
during the non-rush hours, during which it is generally necessary to operate more cars
than actually required by the traffic in order to maintain satisfactory headways.
The City should have a potent voice in the operation of the company's system
as well as of the City's system, and in the expenditure of money therefor. An effec-
tive method of control by the City of operation, fare, service and facilities should be
provided in this contract.
Depreciation Reserves and Funds.
The company's proposal under Article XIX, Paragraph 17, "Depreciation of Re-
serves and Funds," provides for three distinct depreciation reserves to be known as:
(a) Depreciation reserve fund for lessee's system;
(b) Depreciation reserve fund for equipment of City's system;
(c) Depreciation reserve fund for construction, meaning the City's system.
This paragraph specifies that "these reserves shall be set aside in amounts accord-
ing to the classification to be determined from time to time by the Director and the
lessee."
It has been the company's policy under the present management to set aside, for
maintenance and maintenance reserves, 15 per cent. of the gross earnings of the pres-
ent system, and this is claimed by the company to be adequate. The proposed con-
tract, however, carefully refrains from placing any limit on the amount, specifying
that it shall be fixed from time to time by agreement between the Director of the De-
partment of City Transit and the lessee.
ļ
During the fifty-year period of the lease there may be a dozen or more different
Directors, and as the depreciation reserve for the company's system is paid to the
company at the end of the lease, if this amount be made larger than the requirements,
a large fund could be accumulated for the benefit of the company at the City's ex-
pense, since these funds form a part of the operating cost and therefore must be de-
ducted ahead of the City's share.
This point should be carefully guarded in the lease. All expenditures of the City's
funds are usually, by law or custom, required to be safeguarded or checked, but by this
paragraph an opportunity is left for a large amount of cash to be diverted from the
City's Treasury dependent upon the judgment and integrity of one man.
A limit of these expenditures should be placed, and it should be thoroughly
specified in the lease that these items are to cover both functional depreciation or un-
fitness for requirements, due to development of the art, and physical depreciation,
due to ordinary and natural wear and tear. In connection with this matter, it may be
61
well to mention that these depreciation allowances are not necessarily constant from
year to year, but vary according to the conditions under which the system is oper
ated.
As bearing upon the present large surplus earnings of the company, the following
recent editorial, referring to physical depreciation, is interesting and pertinent:
•
"Wear and tear go on rapidly with hard usage. Depreciation may come
from any one of several causes, but it is sure to come from use. It is unfortu-
nate that we cannot do more than estimate the annual rate of depreciation.
With all the experience of the past to guide us, we still guess the percentage of
value in plant, which disappears year by year. We say that under normal con-
ditions the life will be five years or ten years, and if we are wise we plan our
depreciation charges accordingly. Then when this question appears to be settled
an abnormal condition develops to disturb the careful figures prepared in easy-
going days, and immediately the rate of depreciation on some elements of plant
rises to double its old figure. The truth is, that this is what has actually taken
place within the last year in steam stations. Boiler room parts are wearing out
twice as fast as they would do if they were subjected to only ordinary service.
Extraordinary loads, making it necessary to run plants at full capacity, demand-
ing that every part shall do its utmost, makes a reckoning which cannot be
avoided. We make extra money, but we accelerate the insidious physical depre-
ciation which requires early replacement. Extra gross profits are illusory if they
blind the senses to the costs which follow in their train. Scrap value now is
high, but if it is low when the actual replacement goes through the books the net
cost will be high. The benefits of the long period of heavy demand are not real
benefits, unless they provide amply for the consequences of heavy wear which ac-
company them." *
Expenses of Department of City Transit.
During a large part of the 50 years covered by this contract, the Department of
City Transit will be engaged largely in duties pertaining to the regulation of service
on the system.
Such cost should be borne by the business and included as part of the operating
expenses of the property.
The Department of City Transit represents the City's share as a partner and its
expenses are a proper part of the operating expenses.
If not so included they must be paid out of the City's 90 per cent. of the surplus if
such exists, and if there is no surplus, out of the current revenues of the City as at
present.
During the period of the contract these expenses will amount to fully $5,000,000.
If they be paid out of the City's net revenue rather than as operating expenses, the
effect will be the same as paying the company a 10 per cent. commission thereon, or
$500,000.
Security.
Although this is to be a contract running over 50 years and involving huge sums
of money, the company is not required to put up any bond for faithful performance,
*Electrical World, March 10, 1917.
62
and no security of any form whatever is offered to the City either for the City's funds,
for which it is responsible, or for the execution of the terms of the contract. The com-
pany is treated in the draft as being equal to the City in resources and credit respon-
sibility. Whether a bond is necessary or desirable is a legal point which will not be
discussed here as that can be left for determination at a later date.
While the integrity of the company is assured by the prescribed dividend which is
fortified by an automatic charge for transfers and otherwise, the City should satisfy
itself that there is no article in the relations between the company and its subsidiar-
ies under which the company could be disabled and its commitments thereby cast off.
In such an event the City would have no protection with respect to the underlying
companies.
It is proposed to eliminate the Union Traction Company and the Market Street
Elevated Passenger Railway Company as. parties to the agreement, the contract being
executed between the City and the Philadelphia Rapid Transit Company only. In
this respect this contract would follow the lines of the contract of 1907, which does
not run to the successors and assignees of the Philadelphia Rapid Transit Company.
This Department, from the beginning of the negotiations, has held that the financial
position of the Philadelphia Rapid Transit Company did not warrant the City in
executing a contract with it without making its main subsidiary-The Union Traction
Company and the Market Street Elevated Passenger Railway Company, joint partners
in the lease.
Until within a very few months, the margin of earnings above what is necessary to
pay the rental requirements of the Union Traction Company has been insignificant.
The prosperity which has swept over this country as a result of the European War
has been reflected in the earnings of all transportation companies, including the Phila-
delphia Rapid Transit Company, and from a precarious position such as existed for
the last ten or twelve years the company now finds itself with a temporary condition of
affluence suddenly thrust upon it. One swallow, however, does not make a summer,
and 18 months of improved earnings do not warrant, in the opinion of this Depart-
ment, the City revising its opinion as to the advisability of having a good endorser for
the company's signature on the proposed lease.
To secure the Union Traction Company's full co-operation in this undertaking it
will be necessary that it become a joint party to the contract.
The Legal Aspect.
Under the plan proposed by the Philadelphia Rapid Transit Company, the lines of
both the City and the company are to be operated as one complete system, and the
operation, maintenance, bookkeeping, control, etc., are to be unified. The whole sys-
tem will become to all intents and purposes an enlarged Philadelphia Rapid Transit
System, with the City directly providing the capital which represents about one-third
of the total investment and being directly responsible for the interest and sinking fund
charges thereon. The earnings of the system are to be so distributed that for many
years the City's share is estimated to be insignificant if not totally negligible.
63
The first question to be settled is the legality of the proposed merger. Upon this
point the opinion of the City Solicitor is given herein as Appendix "D." Legal opin-
ion on this question seems to differ, however, as I have been informed by other counsel
that this lease as proposed is not legal as it is in spirit at least a direct loan of the
City's credit to a corporation. The following is quoted from the opinion of the Su-
preme Court, referring to Article IX, Section 7, of the State Constitution:
"The mischief which this section interdicts is a business partnership between
a municipality or subdivision of the State, and individuals or private corporations
or associations. It forbids the union of public and private capital or credit in any
enterprise whatever.
"In no project originated by individuals, whether associated or otherwise, with
a view to gain, are the municipal bodies named permitted to participate in such
manner as to incur pecuniary expense or liability. They may neither become
stockholders nor furnished money or credit for the benefit of the parties interested
therein."
I am informed that the proposed lease and merger directly violates the Constitu-
tion, for while the City does not become a direct stockholder-as no stock will be
issued for its holdings in the merger-it is, nevertheless, by the terms of the lease,
actually assuming the position of a common stockholder, and a guarantor of the
company's surplus and profits to its own disadvantage.
This lease or contract is said to differ from the contract of 1907, since in that con-
tract the City was in no way obligated to furnish either money or credit, and it was
distinctly stated in that contract that the City should not be considered as a partner
and should assume no liability for loss. On this point the City Solicitor's opinion is
usually the City's guide, but in view of this variance of opinion, and the vast import-
ance of the matter, the City should proceed with care and, if possible, avoid a form of
lease or contract which is legally questionable.
Comment on Estimates of Gross Revenue.
"One of the most difficult matters that any body of men charged with the
granting of franchises has to face is the estimating of what the future may bring
forth, and it is along this line that both utility operators and communities have
frequently been seriously in error in the past.
99
The only guide for the future is the past. It is now sixty years since the first
franchise for a street passenger railway was granted in Philadelphia, and to forecast
the results which may be expected from fifty years further development with such a
unified system as is now contemplated is at best only an estimate (based on statistics
of past years) of population, business conditions and other factors, all now unknow-
able. The base estimate from which all other figures must be derived is the estimate
of the gross earnings year by year, and hence great care must be used to insure that
*Electric Railway Journal, March 17, 1917, page 496.
64
GROSS
EARNINGS PER CAPITA.
$6
8
$24
23
22
21
20
19
18
17
16
15
14
13
12
10
ACTUAL-
CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
GROSS EARNINGS PER CAPITA
COMBINED SURFACE AND
RAPID TRANSIT SYSTEMS
(A) Previous Department Estimates Considered as Probable
and Conservative
(B) Estimated as Possible Under Favorable Conditions
ESTIMATED
ESTIMATED
-B
400
ESTIMATED
350
300
250
1890
1900
1910
1916
1920
1930
1940
1950
1960
1970
YEARS
MARCH 1817
DIAGRAM NO. 13
CORRESPONDING JOURNEYS PER CAPITA
Per Annum
whatever probable error exists in the estimate shall be on the safe or conservative
side.
The company has not supplied the Department with any official estimate of future
gross earnings on the basis of the unified system.
Consulting Engineers' Estimates of the Financial Results of Operation.
The report of the Consulting Engineers, Messrs. Ford, Bacon and Davis, herewith
attached as Appendix "A," contains two estimates of the financial results of opera-
tion designated as Estimate "A" and Estimate "B."
Estimate "A" is based on a conservative and probable rate of growth in popu-
lation and riding habit predicated on statistics of the past twenty years.
Estimate "B" has been reached by estimating the gross revenue from the rate of
increase in the immediate past.
Estimates of Gross Revenue.
Upon the fundamental estimate of gross revenue all other estimates rest. The
estimates of gross revenue as made by the Consulting Engineers is based on the fol-
lowing formula:
Passenger Revenue per Year=
Population × Number of Revenue Rides per Capita per Year × Average Fare.
Thus, for the year to June 30, 1916, the gross revenue of the company appears as
follows:
$24,871,000=1,792,000 271.6 $0.05163.
In these estimates the fare is assumed as fixed at a flat 5 cents, with universal
free transfers, and an allowance is made for miscellaneous earnings.
The variable factors in this formula are the population and the riding habit of the
people.
This recent rate has averaged 4 per cent. compounded annually, as shown from
the following statement from the 1916 Report of the Philadelphia Rapid Transit Com-
pany:
"The normal increase in gross earnings for this property has been estimated
at 4 per cent. per annum, and this rate of increase was estimated when the fore-
cast of the results for this period was prepared; the gross earnings for the year
ended June 30, 1908, being used as a base figure. The actual average increase in
gross earnings has been 4.22 per cent. per annum, the total gross earnings for the
year ended June 30, 1916, being $25,839,344 as against the original estimate for
that year of $25,450,000 on a basis of 4 per cent. annual increase."
Diagram No. 18 shows that if this rate were continued for the period of the con-
tract it would lead to ridiculous and impossible results. In this estimate it has been
assumed that the 4 per cent. rate may continue for possibly ten years, and then be
reduced gradually until it becomes the same as the rate of population growth. Dia-
1
5
65
gram No. 13 shows that this assumption requires that the riding per capita reach
the maximum of 400 rides per year at about 1945. This is a possible although not a
probable supposition.
The actual earnings will probably lie somewhere between these estimates, and
closer to the "A" than to the "B".
The Consulting Engineer's report shows clearly that under the proposed contract
the City will have to provide for an annual deficit which will affect the City's treasury
for many years, reaching a maximum in 1932 of $5,157,000, according to Estimate “A”,
and in 1926 of $4,488,000, according to Estimate "B".
Estimated Cost of Service per Revenue Passenger.
Diagram No. 21 of the report shows that the actual cost of service under the City's
program with operation under the terms of the proposed lease would, by Estimate
"A", average over 5 cents per revenue passenger for thirty-five years, from 1919 to 1953,
reaching a maximum of about 6 cents for the years 1923 to 1928.
This report assumes that the merged system would be efficiently managed without
unduly severe requirements as to service and standards of loading.
66
A BRIEF HISTORY OF THE PHILADELPHIA RAPID TRANSIT
COMPANY AND THE 1907 CONTRACT
Preliminary to a study of the 1907 contract it may be profitable to review the his-
tory of the Philadelphia Rapid Transit Company, and point out the financial obliga-
tions which it has assumed, and the strenuous efforts which have been necessary in
recent years to prevent a receivership and a general reorganization of the company,
which fate has appeared imminent upon at least two occasions in the past.
The first of these resulted in the contract of 1907 with the City.
The second, in 1910, resulted in a change of management and the utilization of
the credit and resources of the main underlying subsidiary company in order to avert
disaster.
History of Organization of the Company.
The Legislature of 1901 passed certain laws legalizing the formation of com-
panies in Pennsylvania for the construction and operation of subways and elevated
railways in cities of the State for passenger transportation. Previously the laws had
only recognized surface passenger railways and steam railroads having general powers.
These laws were passed with little discussion, and promptly signed by the Governor
on June 7, 1901. Charters for six subway and elevated railways and seven surface
railways were immediately applied for and granted June 10, 1901. These lines are
shown on the map forming the frontispiece of this report.
The incorporators of these companies were men prominently identified with the
politics of Philadelphia, and on June 13, 1901, ordinances granting franchises for the
construction of 112 miles of elevated and subway track were signed by Mayor Ash-
bridge, thus inaugurating a movement for rapid transit which, at that time, contem-
plated purely private ownership and operation. At the same time franchises were
granted to the same promoters of the seven surface lines, covering 266 miles of track.
The original owners of these franchises endeavored in a number of ways to inter-
est bankers and financiers in the proposition. Their activities alarmed the owners of
the Union Traction Company, and the existing Philadelphia Rapid Transit Company
is the outgrowth of the effort to protect that company and avoid disastrous competi-
tion.
The Philadelphia Rapid Transit Company is defined in this proposed contract as
"a motor power company, duly organized and existing under the laws of the State of
Pennsylvania, and by virtue of various leases, agreements and stock ownerships, is
operating a system of surface, elevated and underground railways in the City of Phila-
delphia, with minor extensions into surrounding territory and possessing the au-
67
thority inter alia to undertake the equipment and operation of rapid transit facilities
constructed by the City."
It is not necessary at this time to go into the details of all the political, financial
and other factors which entered into the decision to organize this company.
Lease of the Union Traction Company.
This company, the Philadelphia Rapid Transit Company, belongs to the class of
corporations known as "Holding Companies," and was chartered under the law of
March 22, 1887, and began business as of May 1, 1902, by purchasing outright from
the original promoters the charters, stocks and franchises of all these proposed rapid
transit and surface lines, and leasing for a period of 999 years the Union Traction
Company, which controlled 457 miles of surface track, mostly within the City limits.
This lease of the Union Traction Company was drawn by that company's attor
neys with every care and precaution to protect the Union Traction Company, and pro-
vided for a rental as high as it was deemed possible for the Philadelphia Rapid Tran-
sit Company to pay without reducing it to bankruptcy. That rental was based on
optimistic estimates and seemed excessive at the time. Subsequent events have proved
it to be beyond the earning capacity of the property until very recently.
A reference to Diagram 6 will show clearly that the financial difficulties under
which the company labors are not of recent origin, but that they originated largely
in the terms of the lease of the Union Traction Company in 1902, and this lease, carry-
ing with it, as it does, a heavy burden of charges still further underlying, makes it
almost impossible for the company as now situated to provide such high-speed service
as the City requires without the use of the City's credit.
The company realized, soon after its formation, that the rentals, fixed charges,
and franchise obligations which it assumed under its lease of the Union Traction
Company were more than it could carry, and the contract of 1907 resulted from an
attempt of the company to strengthen its financial position by enlisting the City's
aid and protection by commuting uncertain franchise elements into fixed and definite
annual payments to the City on a basis favorable to the company.
Conditions Leading to the 1907 Contract.
Public service corporations in the past, in their desire for profits for their own-
ers, having often neglected to furnish service to the public of the standard to which
the public believes it is entitled. This difference in interest has led for many years to
controversies between the public service corporations and the public.
The history of the surface transportation companies of Philadelphia is a story
of constant effort on the part of the owners of the companies to prevent competition
and increase their profits on the one side and of the desire of the public to secure a
higher standard of service on the other side.
The year 1907 is an important one in the history of traction development in Phila-
delphia. Up until that year, the City had more or less control of the traction situa-
68
tion. It is true that the City had not exercised its authority or rights, but up to
that time it had the power to demand and secure from the company a square deal in the
traction situation.
What is known as the contract of 1907 between the Philadelphia Rapid Transit
Company and the City represents the culmination of the controversies which had
existed up to that time and was brought about in an endeavor to remedy the situation.
It is interesting to note that the conditions existing at that time in Philadelphia
were not peculiar to Philadelphia, but were more or less general over the entire
country, and it was being generally realized that public utility corporations chartered
by the States were becoming a law unto themselves and beyond the control of the local
authorities. It was realized that the public must exercise some control over the financ-
ing, profits and service rendered by these public service companies, and in the same
year that Philadelphia signed the contract with the Philadelphia Rapid Transit Com-
pany, the States of New York and Wisconsin established the first Public Service Com-
missions with authority to regulate and control all public utility corporations. Once
started the idea rapidly spread, and to-day nearly every State in the Union has organ-
ized a Public Utility Commission; Pennsylvania having followed, somewhat tardily, in
the year 1913.
In discussing the contract of 1907, which has now been in existence for ten years,
it may be pertinent here to give a few of the underlying causes which led to the execu-
tion of this contract.
"
The Philadelphia Rapid Transit Company in 1907 realized that the requirements
of its leases and the requirements of its City franchises and other burdens which it
had assumed were more than it could carry under its limitations. It therefore set
about a plan of readjustment which should relieve it of many of its burdens.
To this end its eminent attorneys prepared a form of contract and submitted it
to the City offering the City what purported to be a cash substitute and a partial
control over the company's financial requirements and service rendered in return for
relief from certain obligations. At the same time the contract provided that while
recapture of the company could be secured at the end of 50 years upon terms more or
less improbable, it repealed the City's right to recapture the underlying franchises,
thus strengthening the position of the underlying companies. In addition a tentative
profit-sharing clause was provided, and the contract as a whole was placed before the
public so as to appear largely for the City's benefit. At least the City was given to
understand that it would not suffer financially and that it would be in a better posi-
tion as to the control of the company.
The contract was executed to take effect July 1, 1907, without any particular in-
vestigation, and the company's statements were accepted without question or analysis.
Now after being in existence for ten years, it is realized that the City has not received
a quid pro quo under the contract.
The City gave up its most valuable rights and received in return for some of them
nothing of substantial value.
A contract of this character is theoretically supposed to be for the mutual benefit
of the contracting parties, but this has not proven so.
69
Former Franchise Obligations of Company to City.
There existed in the company's underlying franchises a number of conditions
which caused it more or less anxiety as well as the probability of great future expense,
the chief of these being the Ordinance of July 7, 1857, which contained the following
provisions:
"SECTION 1. The Select and Common Councils of the City of Philadelphia do
ordain, That all Passenger Railroad Companies within the City of Philadelphia
shall be subject to the restrictions, limitations, terms and conditions hereinafter
provided; and any such company before entering upon any road, street, avenue or
alley, within the limits of said City, shall be understood, and deemed to be subject
thereto, upon the conditions hereinafter prescribed.
"SECTION 3. That all Railroad Companies as aforesaid, shall be at the entire
cost and expense of maintaining, paving, repairing and repaving that may be
necessary upon any road, street, avenue or alley occupied by them. That for the
convenience of the public, it shall also be the duty of such companies to clear the
streets, or other public highways that they may occupy, of snow or any obstruc-
tions placed therein by such companies, when the same impedes the travel upon
said highways, and for any neglect on their part to do so for a period of five days,
they shall be punishable by a fine of twenty dollars for each square that may be
so impeded, recoverable before any Alderman of the City of Philadelphia, and
payable into the City Treasury, upon complaint of five citizens residing therein,
upon oath or affirmation: Provided, Nevertheless, that whenever any such com-
pany shall deem it inexpedient to use their said road during the continuance of the
snow, they shall provide comfortable sleighs, or other suitable vehicles for the
transportation of passengers along the route of their railway at the usual rates
as aforesaid, then, and in that case, no such penalty shall be recoverable.”
Section 8, of the same ordinance, which reserved the right of recapture to the
City upon terms while somewhat indefinite, nevertheless determinable by the courts,
reads as follows:
"SECTION 8. The Directors of any such company or companies shall, imme-
diately after the completion of any passenger railroad in the City, file in the office
of the City Solicitor, a detailed statement, under the seal of the company and
certified under oath or affirmation by the President and Secretary, of the entire cost
of the same; and the City of Philadelphia reserves the right at any time to pur-
chase the same, by paying the original cost of said road or roads, and cars at a
fair valuation. And any such company or companies, refusing to consent to such
purchase, shall thereby forfeit all privileges, rights and immunities they may have
acquired in the use or possession of any of the highways as aforesaid; or should
any such company or corporation neglect to run cars upon their road or roads
for the accommodation of the public, for the space of three consecutive months, the
Councils reserve the right to rent the same to any other person or persons, com-
pany or companies, who will be willing to run cars on the same; or in the event
of the Councils, as aforesaid, being unable to rent said road, or to place cars upon
the same for one year after the same shall have been abandoned, as aforesaid, by the
company constructing or owning the same, then, and in such case, the Councils
reserve the right to cause the said road to be removed from the highways, and to
sell or dispose of the materials thereof, and after paying all expenses arising
therefrom, pay the balance, if any, to the legal representatives of the said default-
ing company."
70
The Ordinance of July 7, 1857, was further strengthened by the ordinances grant-
ing the right to electrify the various roads in 1892 and 1893, in which it was specifi-
cally directed that the companies shall enter into an agreement or contract with the
Mayor of the City which shall
66*
*
*
among other things provide, that the said railway company shall
agree to keep and maintain in good order at all times, whether paved, macadamized
or unimproved, all streets, avenues or roads traversed by its lines of railway or
by its trolley system, that the said railway company shall agree to accept as bind-
ing upon it the terms and conditions of all laws and ordinances now in force or
which may hereafter be passed relating to the government, control or regulation
of railways or railroads of any kind within the City of Philadelphia. That in the
construction and equipment of its roadbed, cars or its trolley system, all kinds and
character of materials, supplies or workmanship, plans, profiles, elevations, designs,
etc., shall be subject in every way, at all times, to the approval and inspection of
the Departments of Public Works and Public Safety; that the said company shall
take down and remove the overhead trolley system whenever directed to do so by
ordinance of Councils; that the said railway company shall run cars over their en-
tire line at intervals not exceeding five minutes between the hours of 6 and 9 A. M.
and 5 and 8 P. M., and at intervals not exceeding ten minutes at all other hours
of the day, excepting between the hours of 12 midnight and 5 A. M., when they
shall run at least every hour. The rate of fare to be charged for a single continu-
ous ride over the entire line shall not exceed the present fare, excepting between
midnight and 5 o'clock A. M., when it shall not exceed 10 cents.
*
*
*99
"SECTION 3. That the said company shall, under the supervision of the Depart-
ment of Public Works, repave in good, substantial and workmanlike manner, with
Belgian blocks or other improved pavement, as directed by ordinance of Councils,
or by the Director of the Department of Public Works, and to be done in a manner
to be prescribed by and to the satisfaction of the said Department, all streets to
be occupied by it not already repaved with such improved pavement, and also all
other streets heretofore repaved with an improved pavement, the repaving of which
is not satisfactory to the said Department, said repaving to be done from curb to
curb for such length of street as shall be occupied by poles and trolley wires or by
other electric motive-power system. Such repaving shall be commenced upon each
of the said streets as soon as the construction of the roadbed, or of the poles or
trolley wires, or other electric motive-power system, shall be commenced thereon.
and shall be pushed and completed with all reasonable and proper diligence as
rapidly as such system is being constructed in said streets, or as Councils may by
ordinance otherwise direct; if not thus pushed, the Director of the Department of
Public Works may enter upon the streets and complete the same at the expense
and cost of the said railway, trolley or other electric motive-power company con-
structed therein; and that said company shall at all times hereafter keep the said
paving in good repair when directed to do so by the Department of Public Works
so long as the said trolley, or other motive-power system shall be maintained on
such streets: Provided, That such repaving or repaving aforesaid shall not free
the said company from any other paving, repaving and repairing the streets occu-
pied by it that may be required by any ordinance of Councils that has been passed,
or that may be passed, or from any other duty or obligation resting upon it regard-
ing paving and repaving that is incumbent on it under and in virtue of any Act of
Assembly."
71
Records are not available showing what these conditions cost the companies when
the roads were originally constructed; nor is there any record to show that the de-
tailed statement was filed with the City Solicitor on the completion of any of the
passenger railroads, certifying to the entire cost of the same at that time.
Paving Obligations.
Under the ordinances of 1892 and 1893, the underlying companies of the Philadel
phia Rapid Transit Company spent an amount estimated to be approximately $15,000,-
000 in carrying out the paving conditions specified and the company realized that the
paving maintenance was steadily increasing in amount and would shortly become an
unbearable burden as the renewal of the pavement was required. Most of this pave-
ment had originally been laid down between 1893 and 1896, under a ten-year guar-
antee, and as the paving was more or less damaged by plumbers, by the Water and
Gas Departments of the City and by other companies opening the street for construc-
tion, litigation. would probably have resulted upon an order of the City to renew cer-
tain of the pavements.
The actual cost of these pavements to the underlying companies ($15,000,000 be-
fore 1902) is now in the capitalization guaranteed by the Philadelphia Rapid Transit
Company at a very much larger amount owing to the refinancing that has taken place,
and to-day it is safe to estimate that at least one-eighth of the company's fixed charges
or $1,200,000 is the direct result of this franchise payment or condition imposed by
the City in an attempt to obtain for itself some part of the financial benefit which it
was believed would result from the exercise of the license or franchise under which
the companies were to operate.
Practically all the paving for which the company was responsible was laid prior
to the year 1902 and paid for almost entirely by the original traction companies the
Peoples Traction Company, The Electric Traction Company, The Philadelphia Trac-
tion Company, The Hestonville Company and the Union Traction Company. The first
four companies preceded and afterwards became subsidiaries of the Union Traction
Company.
Up until the year 1893, in which the electrification of the Philadelphia lines began
on a large scale, Philadelphia probably could boast of being one of the poorest paved
cities in the country. During the years 1893, 1894, 1895 and 1896 Philadelphia's
streets were transformed by the placing of between 5,000,000 and 6,000,000 square
yards of brick, asphalt and Belgian block paving. The average cost was probably
$2.50 per square yard, which included the five- or ten-year guarantee for the mainte-
nance of the pavements. The full burden for maintenance of these pavements, there-
fore, did not fall upon the company until after 1903.
In 1907, when it was proposed that the City should take over the pavements on all
the streets occupied by the company, and thereafter maintain them, the company pay-
ing a fixed sum annually to the City in lieu of certain obligations including mainte-
nance of these pavements, the company claimed that $500,000, the amount fixed, was
in excess of its average expenditure on this account for the preceding five years. These
payments were stated to be about as follows:
72
Paving Maintenance
Snow Removal
Car Licenses
$360,000
20,000
110,000
$490,000
In this figure no allowance is made for the amortization or renewal of the existing
pavements. Had the City's ordinance specified that these pavements should be paid
for by a bond issue to be amortized in say 20 years by a sinking fund deducted from
earnings ahead of any dividends on the company's stock, the situation would have
been less serious as the bonds would now have been amortized and the renewals would
not appear in the operating expenses or maintenance. This is not to be understood as
in any way approving of the general practice of requiring passenger railway com-
panies to be responsible for street paving as a franchise payment. Until recently it
was common practice for cities to impose such a condition, and the lack of knowledge
as regards the profits of the business and inability to foresee future conditions were re-
sponsible for the acceptance of such conditions by the companies twenty years ago.
It is not to be assumed, however, that the company would be to any degree in a better
condition to-day had this paving condition been omitted. The capitalization of the
company would probably have been about the same, as it was based on what it was
estimated by the promoters and bankers "the traffic would bear," and neither Councils
nor the company dreamed at the time that the conditions imposed would in any way
hamper the welfare of the company or City in the future.
With wages of platform men at 17 cents per hour or less, and coal selling at $2.00
per ton or less, the margin of profit on a 5-cent fare with few transfers seemed large
at the time and the burden from the paving was so little realized that the promoters
accepted the franchises with little protest. It was nearly ten years before the com-
pany realized that to carry out the conditions of the franchise would mean eventual
bankruptcy.
Aims of the Company in the 1907 Contract.
In drawing up the 1907 contract it was desired on the company's part:
1. To retain the franchise of the Frankford Elevated Line and extend its life.
2. To be relieved from the obligation to construct the remaining rapid transit
lines for which the company held charters and franchises.
3. To secure the first option to build all new transportation lines, surface or
high-speed, which the City might determine to be necessary.
4. To remove the conditions in the electrification ordinances calling for the re-
moval of the overhead trolley wire when directed by ordinances of Councils, this con-
dition having hung over the company's head like a sword of Damocles.
5. The removal of the right of the City to recapture the lines as provided in
the ordinance of 1857.
73
6. The relief from the burdensome paving conditions which would eventually
mean bankruptcy.
7. To secure the City's moral support and co-operation with the company, and
by the spirit of partnership proposed, render the company more or less immune from
attack by the City, which was bound under the contract to acknowledge and protect,
as far as might be possible or necessary, the perpetual franchises of the subsidiary com-
panies.
Advantages Claimed as Inuring to City from 1907 Contract.
From the City's side, the contract was argued to be desirable:
1. For the reason that the City would secure complete control of the pavements
on its streets; that the company would pay a fixed sum per annum, starting with $500,-
000, into the Public Treasury in lieu of its franchise requirements.
2. For the reason that the City would have a voice in the management and con-
trol of the corporation, and to give this a semblance of fact, the Mayor and two di-
rectors appointed by the City were to sit in the company's Board of Directors.
3. The City was to share equally with the company in all net earnings above that
amount necessary to pay 6 per cent. on the company's stock cumulative from 1907.
4. All future financing of the company was to be approved by the City Councils
and the company's accounts were to be audited annually by the City Controller.
5. A Sinking Fund was established out of earnings to enable the City to purchase
the company's stock at par at the end of the contract.
Thus the City was to be made a partner in the profits, but not in the losses of the
company.
The City in giving up its right to recapture the perpetual franchises undoubtedly
sold its birthright for a mess of pottage.
But ten years, or only one-fifth of the term of the contract, have now elapsed
since the contract was executed, and not only has there been no money payable to the
City on the surplus available over 6 per cent., but the cumulative fund due the com-
pany for dividends since 1907 amounts to over $15,000,000, and it is improbable that
it would share in the profits for many years, even with no improvement in the service.
Bearing of 1907 Contract on Present Situation.
It is this 1907 contract which must be substantially modified in order to per-
mit the execution of a lease for the new lines to the Philadelphia Rapid Transit Com-
pany.
The following statement, published by the former Director of this Department,
April 7, 1914, shows the effect of this contract on the present situation.
The com-
pany's request to be relieved of the commuted payments due under this contract will,
if granted, represent a total relief of all franchise payments and equal in amount the
dividend now demanded by the company:
74
400%
RELATIVE GROWTH OF TRANSPORTATION
YEAR
REQUIREMENTS OF PHILADELPHIA
CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
Gross Earnings
Gross Earnings Population Gross- Proportional Increase In
of
of Earnings Grass Earnings Population: Per Capito
Present System Philadelphia Per Capita
|1890 $ 6,701,557|1,046946| $6.41
||1895$ 9,848270
100%
147%
100% 100%
1900 $13,249,814 1.293,000 $10.24
198% 123.5% 160%
300-1905 $16.374.625
244%
1910 $18,501 357 ||,5 48,008 $11.94
1915 $23.843,606 1,700,000 $14.03
*Estimated
276%
147.9%
186%
356%
162.4% | 219%*
PROPORTIONAL INCREASE SINCE 1890
200%
100%
1890
1895
1900
·Gross Earnings
Estimated
Gross Earnings
Per Capita
Estimated
Population
YEARS
1905
1910
1915
MARCH 1917
DIAGRAM NO. 14
POPULATION
5,000,000
4,000,000
3,000,000
2,000,000
ACTUAL
CURVES
OF
POPULATION
ESTIMATED.
(B) ESTIMATED
ALESTIMATED
1,000,000
METROPOLITAN WITHIN 1 MILES OF PHILADELPHIA CITY HALL
WITHIN CITY LIMITS.
ESTIMATED
1870
1880
1890
1900
1910
1920
1930
YEARS
CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
LEGEND
(C) Estimated Probable Population Within 16 Miles of
Philadelphia City Hall
(B) Estimated Population Possible under Favorable
Conditions Within the City Limits
(A) Estimated Probable Population Within City Limits
1940
1950
1960
1970
MARCH 1917
DIAGRAM NO. 15
INCREASE IN POPULATION
CURVES OF
POPULATION INCREASE PER DECADE
600.000
ACTUAL
500.000
400,000
300.000
METROPOLITAN
WITHIN 16 MILES OF PHILADELPHIA CITY HALL
WITHIN CITY LIMITS.
200.000
100.000
ESTIMATED
c) ESTIMATE
B) ESTIMATED
(A) ESTIMATED
CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
LEGEND
(C) Estimated Probable Increase per Decade Within 16 Miles
of Philadelphia City Hall
(B) Estimated Population Increase per Decade Possible under
Favorable Conditions Within City Limits
(A) Estimated Probable Population Increase per Decade
Within City Limits
1860-1870
1870-1880
1880-1890
1890-1900
1900-1910
1910-1920
1920-1930
DECADES
1930-1940
1940-1950
1950-1960
1960-1970
MARCH 1917
DIAGRAM NO. 16
CENTS
5¢
3/4
1/2
1/4
Surplus
4¢
3/4
B
CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
DIAGRAM SHOWING
OPERATING STATISTICS OF
PHILADELPHIA RAPID TRANSIT SYSTEM
(A) TOTAL REVENUE PER PASSENGER
(B) TOTAL COST OF TRANSPORTATION
PER PASSENGER
(C) TOTAL OPERATING EXPENSES AND TAXES
PER PASSENGER
NOTES:- Data from Annual Reports, State Reports,
City Controller's Reports, etc.
Diagram based on TOTAL PASSENGERS - Exchange and
Transfer Passengers Counted as Two Passengers
1/2
Surplus-4
A
4 ¢
Deficit
3/4
5¢
54
3/4
1/2
1/4
Fixed Charges per Passenger
1/2
1/4
3¢
3/4
1/2
4
2¢
Taxes and Licenses.
Depreciation and
Renewals
3/4
1/2
1/4
1 ¢
Operating Cost per Passenger
3/4
3¢
3/4
1/2
1/4
2¢
3/4
1/2
1/4
1 ¢
3/4
1/2
1/2
1/4 UNION TRACTION CO.
PHILADELPHIA RAPID TRANSIT CO.
1/4
0%
1897 1898 1899 1900 1901 1902 1903
1904
1905
1906 1907 1908 1909 1910
FISCAL YEARS
1911
STOTESBURY MANAGEMENT-
1912 1913 1914
1915
19160 ¢
MARCH 1917
DIAGRAM NO. 17
CENTS
(Quotation from pamphlet dated April 7, 1914.)
"CONCESSIONS OBTAINED BY P. R. T. CO. IN 1907 CONTRACT
"In order that all parties in interest may realize how generous the City of
Philadelphia has been to the P. R. T. Co. in the past, and what unusual obliga-
tion rests upon the P. R. T. Co. to reciprocate by aiding the City in establishing
rapid transit facilities, a clear understanding should be had of some of the con-
cessions granted to the P. R. T. Co. under the 1907 contract.
"At the time of the execution of that contract, the P. R. T. Co. was bound to
maintain and repair the paving from curb to curb on streets occupied by its car
tracks and renew the same when worn out. The pavement was then approximately
thirteen years old, and, not having a concrete foundation, had a life of about
twenty-five years. The estimated cost of this paving was $15,000,000, and, there-
fore, the accrued liability of the P. R.T. Co., for the renewal thereof, due to its
being half worn out, amounted to approximately $7,500,000, from which the P.
R. T. Co. was exonerated by the City under the contract.
"If the 1907 contract had not been made, the annual liability of the P. R. T.
Co. with respect to various items referred to therein would have been in the
amount shown in column 1 of the following table. By the operation of the 1907
contract, this annual liability as of 1913 was reduced to the amount shown in
column 2, following:
1
PRESENT ESTIMATED ANNUAL CASH VALUE TO P. R. T. CO. OF 1907 CONTRACT
Liability for
Annual Pay-
ment Under Or-
dinance Condi-
tions Existing
Previous to 1907
(Estimated)
Payments to
City Under 1907
Contract Actual
for 1913
Pavement maintenance
$400,000
Snow removal (as per City Solicitor Kinsey's Opinion of 1904)
Depreciation fund for renewal of pavement when worn out__.
Licenses
200,000
$500,639
750,000
117,500
Sinking fund
120,000
Total
$1,467,500
$620,639
Cash advantage to the P. R. T. Co.
$846,861
"As shown above, the P. R. T. Co. has been relieved by the 1907 contract of
a present annual liability of $846,861.
"It is estimated that this cash advantage to the P. R. T. Co. during the fifty
years of the 1907 contract will amount to $27,533,000. To this should be added
the accrued pavement renewal liability of the company in 1907 of about $7,500,000,
making a total obligation of the P. R. T. Co. of $35,033,000 canceled in this way
by the 1907 contract."
75
RENTALS PAID BY PHILADELPHIA RAPID TRANSIT COMPANY TO ITS PRINCIPAL SUB-
SIDIARY COMPANIES UNDER LEASES
Principal Subsidiary Companies
Amount
Paid in
per Share Paid in on
of Capital Capital
Stock Stock
Total
Amount
Annual
Rental
Per Cent.
on Paid in
Portion
(Divi-
of Capital
dends)
Stock
Union Traction Company...
People's Traction Company.
Electric Traction Company.
$17.50 $10,500,000
30,00 6,000,000
47.42* 8,297,920
$1,800,000
17.1%
608,000
10.1%
581,437
7.0%
Philadelphia Traction Company_
50.00 20,000,000
1,600,000
8.0%
Frankford and Southwark Phila. City Pass. Rd. Co.
50.00
1,875,000
675,000
36.0%
Union Passenger Railway Company..
30.83
925,000 (A) 285,000
30.8%
People's Passenger Railway Company.
10.27
924,056
224,000
24.2%
Second and Third Sts. Passenger Railway Company.
36.36
771,076
254,448
33.0%
Continental Passenger Railway Company.
29.00
580,000
120,000
20.7%
Thirteenth and Fifteenth Sts. Passenger Railway Co.
16.75
334,529
240,000
71.7%
Ridge Avenue Passenger Railway Company---.
28.00
420,000
180,000
42.8%
Philadelphia City Passenger Railway Company
23.75
475,000
150,000
31.6%
Citizens' Passenger Railway Company--.
19.40*
192,500
140,000
72.9%
Germantown Passenger Railway Company-
19.09
572,860
157,500
27.5%
Green and Coates Sts. Philadelphia Passenger Rwy. Co.
Philadelphia and Grays Ferry Passenger Railway Co.,
West Philadelphia Passenger Railway Company.
15.00
150,000
60,000
40.0%
25.00
310,157
49,552
16.0%
50.00 (B) 750,000
150,000
20.0%
Total of Principal Companies (C).
$53,078,098 $7,274,937
*13.07%
* Average.
(A) $ 57,437 of this amount is income to Philadelphia Rapid Transit Co. account of stock owned.
(B) $392,950 of this stock owned inter-company.
(C) Several companies are not included.
76
APPENDICES
APPENDIX A
REPORT OF THE CONSULTING ENGINEERS
SUMMARY OF REPORT
PHILADELPHIA, March 9, 1917.
MR. WILLIAM S. TWINING, Director,
Department of City Transit,
Philadelphia, Pennsylvania.
DEAR SIR:-We hand you herewith our report on the engineering and financial
features of the proposal of the Philadelphia Rapid Transit Company for the equip-
ment and operation of the rapid transit system to be built by the City of Philadelphia.
Summarizing this report, we would advise you first as to the probable financial
return upon the proposed investment of the City.
Estimated Financial Return to the City.
As it is impossible to determine closely the results of financial operation for so
long a period as that covered by the fifty-year lease, we have prepared, based on the
present probabilities and tendencies, estimates for this period, which indicate the
probable maximum and minimum limits of return to the City. The estimates for the
early years of operation are more likely to be realized than those for the later years,
and this early period is the one of greatest probable deficit to the City and, therefore,
of greatest importance in the consideration of this problem.
As representing the minimum limit, we have modified the previous Department
estimates to comply with the terms of the company's proposal. We believe this esti-
mate is entirely conservative and can be depended upon under any but abnormal con-
ditions.
Our estimate of maximum limit is based upon premises which have been used by
the company for previous estimates, and this, we believe, is possible of attainment
under favorable conditions.
As indicated by these estimates, under the company's proposal, an investment by
the City of $87,300,000 with a 5-cent fare, and free transfers, will show after 1921 for
the first fifteen years of complete operation an average deficit of between $4,000,000
and $5,000,000 per annum.
This large operating deficit is caused principally by the following:
1. The proposed outlay for transportation facilities is to be made within a
period shorter than that necessary for a proportionate growth of population and
traffic.
79
2. In the early years of operation the new high-speed lines will largely du-
plicate the service of present surface lines.
3. The present revenue from exchange tickets is abolished.
Under the terms of this proposal and with a 5-cent rate of fare, and assuming
financial results an average between the maximum and minimum estimated limits, the
City will not begin to receive net income to apply to the payment of interest and
sinking fund charges upon City bonds issued for transit development until about ten
years after the commencement of operation in 1921 of the rapid transit lines; the
City will receive the full amount of its interest and sinking fund charges in about
twenty-five years after the commencement of operation in 1921.
At the end of the fifty-year period of the contract, the indications are that the net
deficit, if any, to the City from operation for the entire period, would probably be
small in comparison with the value at that time of the City-owned rapid transit sys-
tem, which the City would have substantially paid for through the operation of the City
sinking funds.
The terms of the company's proposal provide for the payment of $1,500,000 divi-
dends annually upon the company's stock before payment of interest and sinking fund
charges on the City's investment. In order to produce sufficient net earnings to pay
these dividends, it will be necessary during certain years of the period of early opera-
tion to make a charge of at least 1 cent for transfers between high-speed and surface ·
lines. As this charge for transfers would be imposed to maintain the dividends of the
company, it will make no change in the above-mentioned annual deficit to the City of
from $4,000,000 to $5,000,000.
Methods of Providing for Deficit to City.
While various methods have been suggested to compensate partially for these de-
ficits, their entire amount can probably be provided for directly in only one of two
ways:
1. An increase in the tax rate amounting, as a maximum in 1926, to about 25
cents per $100, and gradually disappearing thereafter.
2. A charge in 1922 of a 6-cent fare on both high-speed and surface lines, with
free transfers, or an alternate charge of 8-cent fare on high-speed lines and 5-cent fare
on surface lines, with universal free transfers.
Of these two methods of providing for the deficit, that of raising the rate of fare
to equal the cost of service would seem to be fairer to the public and better economi-
cally. It places the cost of a car ride directly upon the passenger rather than upon
the owner or renter of real estate. From an economic standpoint, the fixing of rates of
fare that will pay the interest and sinking fund charges on the City's bonds is desir-
able, as it will make these bonds self-supporting and thus exempt them from the debt
limit. The City, in such event, would have the ability to issue $87,300,000 of addi-
tional bonds either for further subway construction, port development, or possibly for
other purposes.
80
Another point should not be lost sight of. The indications are that at a 5-cent
fare the City, for the entire fifty-year lease, would show neither surplus or deficit; in
other words, the deficits of early years would be made up by the surpluses towards
the end of the lease. Consequently, if higher than a 5-cent fare be charged in early
years, lower than a 5-cent fare could be charged in later years if the lease permitted,
and if the capital investment be not carried beyond the actual requirements of traffic.
The deficit may be lightened by a number of other expedients which, if made use
of singly or in combination, might materially reduce the amount that will have to be
raised by increased taxes or fares, and likewise shorten the period of deficit. Princi
pal among such expedients are:
(a) One mill personal property tax, surrendered by the State to the City.
(b) Abnormal increase of assessments and taxes on real estate due to rapid
transit development.
(c) Temporary issue of City bonds to pay deficits in whole or in part.
(d)
(e)
Deferring of construction of certain high-speed lines until construction costs
are reduced.
Postponing portions of the City's program of rapid transit development.
(f) Assessment of construction cost upon the real estate benefited.
(g) Grading the sinking fund charges of future bond issues.
(h) Modifications of the company's proposal.
We have shown in our report the estimated financial value of each of these
methods of providing for or reducing the City's deficit. In general, however, the
practicability or legality of some of these suggestions is doubtful, and with others the
income produced would not be applicable to pay for the City's deficits, or is com-
paratively small.
While every practicable advantage should be obtained from these suggestions, we
do not believe that they will wholly obviate the necessity in years of early operation,
either of raising the rate of taxation or increasing the fare as above stated.
Increased Cost of Construction and Resulting Deficits.
The original report of the Transit Commissioner of July, 1913, which we assisted
in preparing, comprised a system of high-speed lines designed to provide for the
immediate needs of the City, and at the same time represented an investment which
readily could be supported by the City and Company with the revenue produced by
increases of traffic in a city the size of Philadelphia. The total estimated invest-
ment in the cost of construction of recommended subway and elevated lines was ap-
proximately $51,916,000, comprising the North and South Broad Street subways,
with delivery loop, and the Frankford and Darby elevated lines, to be operated until
1927 through the present Market Street subway-elevated line. Due to the enlargement
of this program by the addition of several new lines and extensions of original lines,
and on account of the unprecedented rise in the prices of labor and material, the
estimated investment by the City has increased to $87,300,000. Of this increase of
!
6
81
$35,384,000 about $19,292,000 has been due to enlargement of program, $11,792,000 to
increased prices and $4,300,000 to the capitalization of City's interest and sinking fund
charges for the first year of operation, which is now permitted by law.
An interesting statement of the progressive enlargement of this rapid transit pro-
gram with increase of cost and anticipated deficit to the City is shown in the follow-
ing:
COMPARISON OF FINANCIAL RESULTS OF DEPARTMENT ESTIMATES UNDER VARIOUS
PROGRAMS OF CONSTRUCTION AND OPERATION.
Year Estimate Was Made
Estimated Cost
of
Construction
Estimated
Maximum
Annual Deficit
of City
First Year
Showing All
City Charges
Earned
1913__.
1914_
1915
1915 (Revised) __.
1917__.
at 5-Cent Fare
$51,916,000
$1,280,000
1927
54,002,000
67,088,000
1,866,000
1935 ·
2,655,000
1941
64,420,000
2,181,000
1939
87,300,000{
5,157,000*
1955
4,488,000*
1941
*Maximum and minimum limits.
This table shows clearly the increasing liability to the City which has been in-
volved in the progressive development of the rapid transit program.
If the City desires to keep within its immediate resources for rapid transit, it can,
without relinquishment of its ultimate purpose, defer about $22,000,000 of construc-
tion work until more practicable financially, under which condition the remaining cost
of construction, about $65,000,000, would be provided for by the funds already voted
for transit development.
Preferential Payments to Company.
With reference to the propriety of the City granting the company a preferential
payment to represent its existing net income before the payment to the City of any of
its fixed charges, we believe that the history of rapid transit development in large
American cities, especially in New York, shows the desirability of some such provision
where extensive developments are undertaken.
As the preferential proposed in Philadelphia becomes practically a guarantee by
the City for a period of fifty years, it is of great importance that the form and amount
be studied with care.
This preferential, when further secured by an automatic increase in rate of fare
by a charge for transfers, as provided in the proposal of the Philadelphia Rapid Tran-
sit Company, is more favorable to the company than the fixed preferential depending
upon a fixed rate of fare provided for in the New York contracts.
For the detailed reasons stated in our report, if an automatic increase in fare be
permitted in the agreement we believe that the City's investment should fairly rank
on a parity with the company's stock, instead of the dividends on this stock being paid
82
before any payments are made to the City. If this automatic increase in fare be elimi-
nated from the agreement, we believe that the company is fairly entitled to include in
the preferential a dividend on its stock. Without a study of the service of the company,
and until an opportunity is had of analyzing the audit now being made, we cannot
advise whether such dividend should begin at as large a rate as 5 per cent. on
$30,000,000.
Miscellaneous.
We advise against building the Nineteenth Street Station in the present Market
Street Subway for reasons stated in our report.
We believe that the Market Street subway-elevated tracks east of Thirtieth Street
can be used by the Darby line until June 30, 1924, or later.
We recommend that the straightening of the Market Street line under City Hall
be deferred until it can be done without increasing the maximum annual deficit,
which the City will have to meet on account of transit development.
If under the Company's proposal the funds for cost of equipment be provided by
bonds bearing interest at 6 per cent., the interest charge and consequently the deficit
of the City would be greater by over $500,000 annually than if the equipment were
financed by the City at a rate of 4 per cent. per annum.
The provisions for transfer of the equipment to the City at the expiration of the
contract are not clear, but appear to make it incumbent on the City to pay the com-
pany for the entire cost of equipment at the expiration of the contract. During the
term of the contract the cost of equipment will have been largely amortized by the
sinking fund provided for that purpose, and the provision for the division of net in-
come is such that the sinking fund charges practically come out of the City's share.
The City would, therefore, in effect be paying twice for the equipment, which, if in-
tended, is not equitable.
The sinking fund charges on City bonds, or the portion of such charges equivalent
to a proper depreciation reserve, should be deducted from net earnings before the
company's 5 per cent. dividend is deducted.
Recommendations.
We believe that a businesslike method of handling the problem now presented to
the City is comprised in the following plan:
1. Cut the program of immediate construction of rapid transit lines as nearly
as practicable to the amount of the appropriation.
2. Defer for a period of lower prices such portions of the construction as will
not interfere with the value of the rapid transit system to the public.
3. Devote to the payment of fixed charges on the City's investment in rapid tran-
sit such part as practicable of the abnormal increase of taxes on real estate caused
by rapid transit development.
I
83
4. If there should still remain a deficit in the payment of the City's interest and
sinking fund charges on cost of construction, increase the fare in order to make the
undertaking self-supporting; first, by a charge for transfers between high-speed and
surface lines; or second, if this be not sufficient, by charging 6 cents on high-speed
lines with a 5-cent fare on surface lines; or third, by charging a uniform 6-cent fare
on both high-speed and surface lines.
5. Formulate a working contract embodying the foregoing changes and guarding
the City's interests in the particulars discussed in our report.
Respectfully submitted,
FORD, BACON & DAVIS.
84
REPORT
PHILADELPHIA, March 9, 1917.
MR. WILLIAM S. TWINING, Director,
Department of City Transit,
Philadelphia, Pa.
DEAR SIR:-As requested by you, we have made an analysis of the engineering and
financial features of the proposal of the Philadelphia Rapid Transit Company for the
equipment and operation of the rapid transit system to be built by the City of Phila-
delphia, as embodied in "An Ordinance revised to cover the company's offer of De-
cember 20, 1916," which you handed us on January 24th.
Based upon this proposal we have prepared estimates of the probable financial
results to the City, together with estimates of results of various methods which you
have outlined to us to meet the deficits indicated.
PROPOSAL OF THE PHILADELPHIA RAPID TRANSIT COMPANY
The proposal of the Philadelphia Rapid Transit Company provides for the con-
struction by the City of certain railroads, principally subway and elevated, the equip-
ment and power for which would be furnished by the company, with provision for
further rapid transit and surface lines, which may be added by the City during the term
of the contract. The lines thus built by the City are to be leased to the company to be
operated in conjunction with the rapid transit and surface lines now owned or con-
trolled by the company as a unified system.
Fare.
The fare is specified as 5 cents, with free transfers between the various rapid
transit lines and between the various surface lines, and between rapid transit and sur-
face lines, but it is provided that the fare may be increased and that charges for
transfers shall be made under certain contingencies.
Rental.
The rental to be paid the City for the use of its property is the resultant of a speci-
fied division of the net income of the entire system, which is determined by deducting
from the gross revenue from all sources the following:
1. Operating expenses, including maintenance, damages and taxes, together with
maintenance, damage and depreciation reserves.
2. Interest and sinking fund charges on the cost of equipment of new lines;
present and future fixed charges on the company's system; and 5 per cent.
annual dividends on the company's paid-in capital stock of $30,000,000.
3. Depreciation reserve for City's construction; and contingency reserve.
The foregoing payments are to be cumulative in the order named.
85
Of the balance or net income, 10 per cent. is to be retained by the company and 90
per cent. paid to the City as rental. The depreciation reserve for City's construction
is defined in the proposal as the excess in amount determined as necessary for depre-
ciation on construction over the City's sinking fund charges on bonds issued for con-
struction. The life of the City structures is estimated at from 75 to 100 years, and
therefore under the above definition there would be no depreciation reserve for City's
construction. Therefore, the total payment to the City under this arrangement would
be such 90 per cent. of net income.
Abolition of Exchange Tickets.
The present 3-cent exchange tickets, from which the company derived approxi-
mately $886,000 revenue for the year to June 30, 1916, are to be abolished at once
and free transfers substituted therefor, except within the delivery district where they
may be abolished in whole or in part after the delivery loop is in operation, by order
of the Director of the Department. In consideration of relinquishing the exchange'
ticket revenue, the City relieves the company from the payment of dividend taxes,
amounting last year to $115,579, and the payment under the 1907 contract in lieu of
street paving, snow removal and car license payments amounting last year to $500,-
000, and suspends for five years the sinking fund payments under the 1907 contract,
which amounted last year to $120,000.
Waiver of Accumulated Dividends.
The company waives the right of distribution of accumulated unpaid dividends on.
its stock from July 1, 1907, to June 30, 1916, as claimed under the 1907 contract.
ESTIMATES OF FINANCIAL RESULTS
The report of Mr. A. Merritt Taylor, Transit Commissioner, of July 24, 1913,
contained certain estimates which we assisted in preparing, including the annual fin-
ancial results of operation of the recommended rapid transit lines for the first thir-
teen years, and estimates of gross revenue from the entire city transportation system
for fifty years, together with estimated costs of construction and equipment. These
figures were based on actual and past electric railway traffic conditions and expenses
in Philadelphia and in other large cities.
These estimates have since been revised by us to comprehend the additions to and
changes in the transit development program, the principal results of which have ap-
peared in the annual reports of your Department.
While, both in diagrams submitted herewith and in estimates referred to below, we
have shown the anticipated results for the full fifty years covered by the contract, it
should be borne in mind that estimates for such a long distance into the future are
indicative only of present probabilities and tendencies, and their principal purpose is
to fix reasonable limits of probable results. The estimates of the early years of opera-
86
tion of the new high-speed lines, which we here show for the first fifteen years, are
more likely to be realized than the estimates for the remaining thirty-five years, be-
cause we have available records both of this and of other similar systems, reaching as
far as fifteen years past, with which the estimates for the same period in the future
can be compared and checked.
For both the fifty-year and fifteen-year periods we have prepared two estimates,
one of which we designate as Estimate A, showing results which can be predicted with
confidence as representing fairly minimum expectations under any but abnormal condi-
tions; the other, designated as Estimate B, while not so conservative, shows results
that are quite possible of attainment under favorable conditions. These two estimates,
we believe, indicate the probable minimum and maximum limits of financial return to
the City and the company from the combined systems of rapid transit and surface lines
now built and under authorization.
Estimate A-Financial Results for Fifty Years of Lease Based on Previous Department Esti-
mates.
In preparing Estimate A, which represents conservative results that may be con-
fidently expected as a minimum, we have used the previous estimates of the Depart-
ment, dividing the net earnings in accordance with the company's present proposal.
We have assumed that the proposed contract will take effect as of July 1, 1917. The
operation of the City lines is expected to be begun about one year later.
The Department estimate of financial results thus brought up to date shows the
following results for the entire period of operation of the City lines under the pro-
posal, from July 1, 1918, to June 30, 1967:
ESTIMATE A
INCOME ACCOUNT OF COMBINED CITY AND COMPANY SYSTEM (UNIFIED SYSTEM) FOR
49 YEARS
With 5-Cent Fare and Free Transfers
1. Gross Revenue
$2,231,038,000
2. Deduct Operating Expenses, including Maintenance, Damages, Taxes
and Reserves for Maintenance and Damages
1,349,094,000
Net Earnings
$881,944,000
3. Deduct Interest and Sinking Fund Charges on Cost of Equipment_-_.
Interest and Fixed Charges on Company's System
$104,723,000
551,520,000
Total Deductions
Remainder
$656,243,000
$225,701,000
4. Deduct 5 per cent. dividend on $30,000,000 of Company's stock_.
73,500,000
Remainder
5. Deduct Contingency Reserve---
Net Income
$152,201,000
1,154,000
·
$151,047,000
6. Deduct 10 per cent. of Net Income retained by Company (available for
additional dividends or other corporate purposes)
7. 90 per cent. of Net Income payable to City
15,105,000
$135,942,000
87
Additional Revenue Necessary to be Obtained by Charge for Transfers.
In the year 1920 the net earnings according to Estimate A will not be sufficient
to pay the company's dividend, and, therefore, according to the company's proposal,
a charge of at least 1 cent for transfers between high-speed and surface lines would
be necessary. This charge would have to be continued for about twelve years, the
amount necessary to be collected thereby being $8,519,000. Adding this amount to
the gross revenue would alter the preceding figures for the term of the contract, mak-
ing a total of $89,458,000 retained by the company as 5 per cent. dividend, and 10 per
cent. of net income and $143,608,000 payable to the City.
Financial Results to City. (Probable.)
The financial results to the City for the entire period of contract, according to
Estimate A, would be as follows:
ESTIMATE A
FINANCIAL RESULTS TO THE CITY FROM 49 YEARS' OPERATION OF UNIFIED SYSTEM
Net Revenue to City from Operation of Unified System
$143,608,000
Deduct Estimated Interest and Sinking Fund Charges on City Bonds is-
sued for Construction___
202,081,000
Deficit
$58,473,000
Add Estimated Abatement of Payments by Company to City under 1907
Contract
Deficit, including Abatement.
43,667,000
$102,140,000
Less Estimated Excess in City's Sinking Fund over Face of Bonds at end
of Contract due to rate of 1 per cent. annual charge as provided by
City exceeding estimated rate required__
Net deficit to City---.
22,000,000
$80,140,000
This estimated deficit is the sum of the annual deficits, and contains no interest
on such deficits.
To compensate for this loss, the City at the end of the contract will have the origi-
nal subway and elevated system which is estimated to cost $87,300,000 free and clear,
except for accrued depreciation, together with the lines subsequently added partly paid
for. Its earning capacity will then have been developed, and there will be no further
fixed charges upon it.
Annual Estimate for First Fifteen Years.
As this deficit would occur largely in the earlier years of operation, and as the
probability of realization of an estimate is greater in this early period, we show below
the estimated annual income account for the first fifteen years:
88
ESTIMATE A
ANNUAL FINANCIAL RESULTS TO THE COMPANY FROM FIRST 15 YEARS' OPERATION
OF UNIFIED SYSTEM
With 5-Cent Fares and Free Transfers
Deduct
Years to June 30
Gross
Revenue
Deduct
Operating
Expenses,
Taxes and
Reserves
(A)
Fixed
Charges on
Deficiency of
Remainder
Cost of
Equipment
Below
Remainder
Company's
and
Company's
$1,500,000
Annual
System
Dividend
1919__
$28,000,000
$16,010,000
$9,743,000
$2,247,000 (B) $747,000
1920-
28,500,000
17,164,000
10,029,000
1,307,000
193,000
1921__
29,100,000
17,672,000
10,186,000
1,242,000
258,000
1922__
29,700,000
18,419,000
10,596,000
685,000
815,000
1923__.
30,467,000
19,479,000
11,029,000
-41,000
1,541,000
1924
31,234,000
19,786,000
11,241,000
207,000
1,293,000
1925
32,000,000
20,028,000
11,373,000
599,000
901,000
1926___.
32,768,000
20,543,000
11,478,000
747,000
753,000
1927___
33,535,000
21,058,000
11,583,000
894,000
606,000
1928-
34,302,000
21,573,000
11,970,000
759,000
741,000
1929
35,069,000
22,087,000
12,087,000
895,000
605,000
1930
35,836,000
22,602,000
12,203,000
1,031,000
469,000
1931_.
36,620,000
23,013,000
12,301,000
1,206,000
294,000
1932___.
37,311,000
23,461,000
12,400,000
1,450,000
50,000
1933___
38,101,000
23,850,000
12,559,000
1,684,000 (B) 184,000
Totals_
$492,443,000
$306,753,000
$170,778,000
$14,912,000
$7,588,000
(A) Contingency Reserve not included.
(B) Amounts over dividend.
It will be noted that in each year, except the first and last, the gross revenue is
not sufficient to pay the company's 5 per cent. dividend, the deficiency reaching the
maximum of $1,541,000 in 1923. As before explained, a charge of 1 cent or more for
transfers between high-speed and surface lines would, under the company's proposal,
become operative in 1920 and would have to be continued for about twelve years.
ESTIMATE A
ANNUAL FINANCIAL RESULTS TO THE CITY FROM FIRST 15 YEARS' OPERATION OF
UNIFIED SYSTEM
90% of Net
Years to June 30
Income
Payable to
City
City's
Interest and
Sinking Fund
Charges
Abatement of
Taxes, etc.,
City's
Deficit
Due to
Abolition
City's
Deficit,
Including
of Exchange
Abatement
Tickets
1919.
$672,000
$360,000
-$312,000 (A)
$675,000
$363,000
1920__
0
545,000
545,000
679,000
1,224,000
1921__
0
942,000
942,000
684,000
1,626,000
1922___.
0
2,455,000
2,455,000
688,000
3,143,000
1923.
0
2,977,000
2,977,000
693,000
3,670,000
1924___
0
3,925,000
3,925,000
698,000
4,623,000
1925.
0
3,925,000
3,925,000
702,000
4,627,000
1926__
0
4,425,000
4,425,000
706,000
5,131,000
1927__.
0
4,425,000
4,425,000
710,000
5,135,000
1928__.
0
4,425,000
4,425,000
714,000
5,139,000
1929_.
0
4,425,000
4,425,000
719,000
5,144,000
1930_.
0
4,425,000
4,425,000
723,000
5,148,000
1931__
0
4,425,000 4,425,000
728,000
5,153,000
1932_
0
1933.
166,000
4,425,000 4,425,000
4,425,000 4,259,000
732,000
5,157,000
786,000
5,045,000
Totals___
(A) Surplus.
$838,000 $50,529,000 $49,691,000
$10,637,000
$60,328,000
89
Maximum Annual Deficits to City.
It will be noted that the maximum annual deficit of $5,157,000, including loss of
abatements, occurs in 1932. This then would appear to be the most unfavorable result
to be anticipated for the City.
Estimate B-Financial Results Possible Under Favorable Conditions.
During the past two years the gross revenue of the company has largely increased,
surpassing for the current year the previous estimates made by this Department.
While this may be the result of temporarily prosperous conditions, consideration should
be given to these enlarged increases in making estimates of future gross revenue.
Past estimates made by the company have been based on a 4 per cent. compounded
annual increase of gross revenue which the actual receipts of the company from 1903
to 1916 appear to justify, as shown by the following statement:
PHILADELPHIA RAPID TRANSIT COMPANY
GROSS REVENUE AND INCREASE PER ANNUM
Per Cent.
Increase
Years Ended June 30th
Gross
Revenue
Annual
Increase
Over
Average
Per Cent.
Per Year
Preceding
Year
Increase
Since 1903
1903__.
1904
1905_
1906_
1907__
1908.
1909__
1910
1911.
1912___
1913_
1914
1915_
1916__
*Indicates decrease.
$15,436,573
16,096,363
$659,790
4.27%
4.27%
16,374,626
278,263
1.73
3.00
17,711,599
1,336,973
8.16
4.72
18,292,080
580,481
3.28
4.36
18,557,503
265,423
1.45
3.78
18,797,993
240,490
1.30
3.36
18,501,357
296,636*
1.58*
2.66
21,529,469
3,028,112
16.37
4.36
22,700,692
1,171,223
5.44
4.49
23,927,179
1,226,487
5.40
4.58
24,255,813
328,634
1.37
4.29
23,843,606
412,207*
1.70*
3.79
25,839,344
1,995,738
8.37
4.15
It is well understood, however, that an annual increase of gross revenue of a fixed
percentage, even though as small in amount as 4 per cent., cannot be continued in-
definitely. For instance, as shown on the diagram on the page opposite, if this 4 per
cent. increase were compounded annually the estimated gross revenue would reach
an unreasonable sum before the end of the fifty-year period. The fifteen-year
period of company's past operation has seen many extensions and betterments to
the company's system and equipment and improvements of its management.
Based on the large expansion and improvement of transit facilities authorized by
the City and comprised in the company's proposal for the coming fifteen years, we be-
lieve it is possible for the 4 per cent. compounded increase in gross revenue to continue
for the greater portion of this period, or say for ten years. We have, therefore, pre-
90
+
CITY OF PHILADELPHIA
DEPARTMENT OF CITY TRANSIT
CURVES SHOWING
COMPARISON OF ESTIMATES
OF GROSS REVENUE OF
UNIFIED SYSTEM
Accompanying Report of
Ford, Bacon and Davis
Consulting Engineers
March 9-1917
ACTUAL
!
ESTIMATED
DSS REVENUE AT 4% PER YEAR INCREASE COMPOUNDED
Beginning with 1916.
=
ESTIMATE
B
GROSS REVENUE POSSIBLE UNDER
FAVORABLE CONDITIONS WITH 5¢ FARE AND FREE TRANSEERS.
PROBABLE GROSS REVENUE WITH 5¢ FARES AND FREE TRANSFERS.
ESTIMATE A
$130,000,000
$120,000,000
$110,000,000
$100,000,000
$90,000,000
$80,000,000
$70,000,000
$60,000,000
$50,000,000
$40,000,000
$30,000,000
$20,000,000
$10,000,000
1890
1900
1910
1915 1916
1920
1930
1940
1950
1960
0
1970
FISCAL
YEARS
MARCH 1917
DIAGRAM NO. 18
pared Estimate B of financial results possible under favorable conditions upon a basis
of such 4 per cent. compounded increase of gross revenue for the first ten years, after
which the rate of increase is gradually reduced until the generally accepted maximum
of 400 rides per capita per annum is reached. In this Estimate B we have also assumed
a higher rate of increase in population than in Estimate A.
The resulting figures for the entire period of forty-nine years of operation of the
City lines under the proposal from July 1, 1918, to June 30, 1967, are as follows:
ESTIMATE B
INCOME ACCOUNT OF UNIFIED SYSTEM FOR 49 YEARS
With 5-Cent Fares and Free Transfers
1. Gross Revenue
$2,668,981,000
2. Deduct Operating Expenses, including Maintenance, Damages, Taxes
and Maintenance, Damage and Depreciation Reserves
Net Earnings
1,582,912,000
$1,086,069,000
3. Deduct Interest and Sinking Fund Charges on Cost of Equipment_---
Interest and Fixed Charges on Company's System
$113,805,000
567,267,000
Total Deductions
$681,072,000
Remainder
404,997,000
73,500,000
Remainder
$331,497,000
1,080,000
Net Income
$330,417,000
4. Deduct 5 per cent. Dividend on $30,000,000 of Company's Stock---.
5. Deduct Contingency Reserve_-_
6. Deduct 10 per cent. of Net Income Retained by Company.
7. 90 per cent. of Net Income Belonging to City
Financial Results to City.
(Possible.)
33,041,000
$297,376,000
The financial results to the City for the entire period of the contract would be as
follows:
ESTIMATE B
FINANCIAL RESULTS TO THE CITY FROM 49 YEARS' OPERATION OF UNIFIED SYSTEM
Net Revenue to City..
$297,376,000
Deduct Estimated Interest and Sinking Fund Charges on City Bonds issued
for Construction
217,331,000
Surplus
$80,045,000
Deduct Estimated Abatement of Payments by Company to City under 1907
Contract
45,950,000
Surplus, less Abatements___
$34,095,000
Add Estimated Excess in City's Sinking Fund over Face of Bonds at end
of Contract
22,000,000
Total Surplus to City..
$56,095,000
91
This estimated surplus is the sum of the annual deficits and surpluses, and contains
no interest on such deficits and surpluses.
In addition to this surplus or profit, the City at the end of the contract will have
the original subway and elevated system, which is estimated to cost $87,300,000, free
and clear, except for accrued depreciation, with later lines partly paid for.
Annual Results for First Fifteen Years. (Possible.)
For the first fifteen years of operation of the City-built lines, the annual results
on the same basis are estimated as follows:
ESTIMATE B
ANNUAL FINANCIAL RESULTS TO THE COMPANY FROM FIRST FIFTEEN YEARS'
OPERATION OF UNIFIED SYSTEM
(With 5-Cent Fares and Free Transfers)
Years to June 30
Gross
Revenue
Deduct
Operating
Expenses,
Taxes and
Reserves
(A)
Deduct
Fixed Charges
on Cost of
Equipment
and
Remainder
Excess of
Remainder
Over
Company's
$1,500,000
Annual
Dividend
Company's
System
1919.
$28,790,000
$16,410,000
$9,743,000 $2,637,000
$1,137,000
1920__
29,285,000
17,678,000
10,029,000
1,578,000
78,000
1921____
30,901,000
18,809,000
10,228,000
1,864,000
364,000
1922___.
32,378,000
19,864,000
10,665,000
1,849,000
349,000
1923__.
33,500,000
20,705,000
11,161,000
1,634,000
134,000
1924
34,837,000
21,692,000
11,375,000
1,770,000
270,000
1925.
36,000,000
22,596,000
11,509,000
1,895,000
395,000
1926__.
37,199,000
23,370,000
11,599,000
2,230,000
730,000
1927___
38,397,000
24,144,000
11,693,000
2,560,000
1928
1,060,000
39,595,000
24,868,000
12,083,000
2,642,000
1929
1,142,000
40,794,000
25,642,000
12,208,000
2,944,000
1930
1,444,000
41,993,000
26,417,000
12,333,000
3,243,000
·
· 1931___.
1,743,000
43,211,000
27,012,000
12,453,000
3,746,000
1932__.
2,246,000
44,429,000
27,606,000
12,573,000
4,250,000
1933
2,750,000
45,566,000
28,201,000
12,753,000
4,612,000
3,112,000
Totals_
$556,875,000
$345,014,000
$172,407,000 $39,454,000
$16,954,000
(A)-Contingency Reserve not included.
92
The results to the City in the same years would be as follows:
ESTIMATE B
ANNUAL FINANCIAL RESULTS TO THE CITY FROM FIRST 15 YEARS' OPERATION OF
UNIFIED SYSTEM
Years to June 30
90% of Net
Income
Payable to
City
City's
Interest
and
Abatement of
Taxes, etc.,
City's
City's
Sinking Fund
Deficit
Due to
Abolition
Deficit,
Including
Charges
of Exchange
Abatement
Tickets
1919
$1,023,000
$360,000
$663,000 (A)
$678,000
$15,000
1920___
70,000
545,000
475,000
684,000
1,159,000
1921__.
328,000
942,000
614,000
690,000
1,304,000
1922___
314,000
2,455,000
2,141,000
696,000
2,837,000
1923__.
121,000
2,977,000
2,856,000
702,000
3,558,000
1924__.
243,000
3,925,000
3,682,000
708,000
4,390,000
1925_
355,000
3,925,000
3,570,000
714,000
4,284,000
1926__
657,000
4,425,000
3,768,000
720,000
4,488,000
1927___
954,000
4,425,000 3,471,000
726,000
4,197,000
1928__.
1,028,000
4,425,000 3,397,000
782,000
4,179,000
1929_
1,116,000
4,425,000
3,309,000
788,000
4,097,000
1930
1,380,000
4,425,000 3,045,000
794,000
3,839,000
1931___.
1,827,000
4,425,000 2,598,000
800,000
3,398,000
1932__.
1933__
Totals_____
(A) Surplus.
2,275,000
4,425,000 2,150,000
806,000
2,956,000
2,596,000
4,425,000 1,829,000
812,000
2,641,000
$14,287,000
$50,529,000 $36,242,000
$11,100,000
$47,342,000
It will be noted that the maximum deficit of $4,488,000 occurs in 1926.
Comparison of Estimates.
In our opinion, Estimate A is absolutely conservative and can be depended upon
as representing the minimum anticipated results. It indicates that a charge for
transfers will be necessary during the early years of operation amounting to $8,519,-
000. The company's dividend would be earned in 1932, and the entire interest and
sinking fund charges of the City in 1955, including abatement of present payments
by company to City.
Estimate B, which we believe is possible of realization under favorable conditions,
shows that for every year of the contract period the full charges of the company,
including dividends on stock, will be earned, and that by the year 1941 the City will
be earning its full charges, including abatement. This is based upon a 5-cent fare,
with free transfers.
Estimate A, which probably indicates the most unfavorable probability from the
City's standpoint, shows a net deficit for the fifty years of $80,140,000.
Estimate B shows a net surplus for the same period of $56,095,000.
In either case, at the end of the contract the City will own the original City-built
system, the cost of which is estimated at $87,300,000, free and clear, except for ac-
crued depreciation, together with later construction partly paid for.
}
93
The estimated deficit by Estimate A would be considerably enlarged and the esti-
mated surplus by Estimate B would disappear entirely and be replaced by a deficit
should interest be added to the annual deficits encountered during the early years of
operation.
We believe it to be most probable that the actual results will be somewhere be-
tween the two estimates. We believe it is quite possible for the City to show no di-
rect financial loss from operation in sum total for the entire period of fifty years of
the proposed contract if interest on annual deficits be not added.
It should be pointed out, however, that during the early years of operation of the
new high-speed lines, as shown by our estimates for the first fifteen years of operation,
under both minimum and maximum estimates, there will be a large deficit to the City,
aggregating a total for this period alone of $60,328,000 under Estimate A and $47,-
342,000 under Estimate B. The annual deficit under Estimate A is over $5,000,000
for each of the years from 1926 to 1933, and under Estimate B exceeds $4,000,000 for
each of the years from 1924 to 1929.
Estimate A shows that at least 1 cent for transfers between high-speed and surface
lines would have to be charged from about 1920 to 1932. Estimate B shows that a
charge for such transfers would not have to be made, although for the years 1920 to
1925, inclusive, an average of less than $300,000 per year would be earned over the com-
pany's dividends.
Construction Estimate.
In these estimates of financial results (the details of which are given in our mem-
orandum supplementing this report) we have based the City's investment on the pres-
ent estimates of the Department, which have been revised to accord with prices in
bids opened February 6, 1917. We have checked these estimates, but in using them
we have assumed that unit prices will be 10 per cent. lower on the average for con-
struction to be undertaken after January 1, 1918, it being considered probable that on
the average prices will so decline. It is impossible to predict definitely such future
prices, but it is assumed that the City will consider it prudent to await a more reason-
able purchasing market for such portions of the work as can be delayed. The estimated
saving by this policy would be about $4,000,000. The figures shown below include in-
terest and sinking fund payments during construction and for one year after com-
mencement of operation. The dates assumed for the commencement of operation of
the various lines are also shown.
94
ESTIMATED COST OF CONSTRUCTION OF PROPOSED RAPID TRANSIT LINES
Lines
Assumed
First
Complete
Year of
Operation
(Ending
June 30)
Estimated
Cost of
Construction
Frankford:
Arch to Bridge Street___
Bridge to Rhawn Street__.
Byberry (Surface)
Darby
Broad Street:
South to Pike Street...
South to League Island_
Pike to Olney Avenue.
Northeast Branch
Germantown Branch
Total Broad Street Subway
Delivery Loop
Parkway Northwest
Chestnut Street Subway
Real Estate
Total____
1919
1920
$8,250,000
1919
1,200,000
1920
4,450,000
1921
1923
37,500,000
1923
1923
2,600,000
1923
2,600,000
$42,700,000
1921
8,000,000
1922
10,200,000
1925
8,500,000
4,000,000
$87,300,000
This estimate differs materially from that contained in the Transit Commissioner's
Report of 1913 and from the Department estimate of November, 1915. Following is a
comparison of these estimates:
COMPARISON OF ESTIMATES OF COST OF CONSTRUCTION
Lines
· 1913
Report
Estimates
Made Before
November,
1915, and
Used in 1915
Estimates
of Financial
Results
November, February,
1915
1917
Frankford:
Arch Street to Bridge Street--
Bridge Street to Rhawn Street_
$5,625,000
$7,425,000
$5,700,000 {
$5,000,000
3,250,000
Total__.
$5,625,000
$7,425,000
$5,700,000
$8,250,000
Byberry
1,100,000
1,200,000
Darby
4,239,000
4,239,000
3,200,000
4,450,000
Broad Street:
League Island to Pike Street
24,385,000
26,691,000
23,300,000
31,300,000
Pike Street to Olney Avenue.
Branches
4,200,000
3,900,000
6,200,000
3,554,000
(A) 1,500,000
3,600,000
5,200,000
Total___
$27,939,000
$32,391,000 $30,800,000 $42,700,000
Delivery Loop
5,018,000
4,372,000
5,900,000
8,000,000
Parkway-Northwest
7,500,000
7,500,000
10,200,000
Real Estate
2,761,000
2,741,000
1,800,000
2,500,000
Total without Chestnut Street Subway $45,582,000
Chestnut Street Subway, including real estate
$58,668,000
$56,000,000
$77,300,000
6,334,000 (B)
8,420,000
8,420,000
10,000,000
Total___.
$51,916,000
$67,088,000
$64,420,000
$87,300,000
(A) Northwest Branch not included, as route had not been determined.
(B) Real Estate not included.
95
The reasons for these differences of estimated cost are as follows:
1. The enlargements in program of construction.
2. The unprecedented increase in prices of material and labor.
3. The including of interest and sinking fund charges capitalized during the first.
year of operation now permitted by law.
The increased cost due to each one of these causes in each period between these
estimates is as follows:
REASONS FOR INCREASES IN CONSTRUCTION ESTIMATES
Difference due to:
Early
1915 Estimate
Compared
with
November,
1915,
Estimate
Compared
with
1917
Estimate
Compared
with
November,
Total
1913 Estimate
Early 1915
Estimate
1915,
Estimate
Enlargement of Program..
$15,172,000
$3,200,000
$1,500,000
$19,872,000
Termination of Darby Line at City Limits
-580,000
-580,000
(decrease)
(decrease)
Changes in Prices---
---5,868,000
17,660,000
11,792,000
(decrease)
Interest and Sinking Fund Charges for
First Year of Operation Capitalized_-
4,300,000
4,300,000
Net Increase
$15,172,000
-$2,668,000 $22,880,000 $35,384,000
(decrease)
In the estimate of November, 1915, the reduction due to the decreased prices,
based on actual bids, amounted to about 5 per cent. of the total cost as estimated
earlier in that year. In the 1917 estimate the increase, due to increase in prices,
amounts to about 26 per cent. of the cost as estimated in November, 1915.
At the rate of increase in traffic as per Estimate A, additional trackage will be-
come necessary in 1955. We estimate that $10,000,000 must be provided for this pur-
pose in that year and $10,000,000 in 1960. This would increase the total cost of con-
struction paid for by the City to $107,300,000 at the end of the contract. If additions
are made by the City other than in accordance with imperative needs of traffic, the
investment of the City in rapid transit development during this period may become
much greater. Under Estimate B it will be necessary to provide additional trackage
by the year 1944, and the total additional amount required by the end of the contract
period is estimated at $35,000,000, which would increase the total investment of the
City to $122,300,000.
Equipment Estimate.
We have based the cost of equipment upon present prices, and have included in-
terest for the first year of operation. To the lessee's investment are added items cover-
96
ing the cost of the proposed new station at Nineteenth and Market Streets, and the cost
of lengthening all stations on the Market Street line to accommodate trains 500 feet
long.
Other Assumptions.
The other assumptions which we have made, together with the details upon which
these estimates have been built up, are submitted to you in a memorandum accom-
panying this letter.
Diagrams Illustrating Financial Results as Estimated.
In order to visualize the expected growth of the street railway and rapid transit
business in Philadelphia and to show the relative proportion of operating expenses,
fixed charges of the company and fixed charges of the proposed City system, diagrams
have been prepared corresponding with Estimates A and B. These diagrams imme-
diately follow this page. The actual figures are plotted from 1890 to 1916, and the esti-
mated figures from 1917 to 1967, when the proposed contract would end. These dia-
grams show clearly the effect on cost of service of the large investment contemplated,
and also the date at which this investment will be carried at a 5-cent fare, with free
transfers. The net income of the company is colored in green; the deficit to the City is
colored in blue, and the net revenue to the City applicable to the City's interest and
sinking fund charges and replacement of abatement in red. The striped portion of the
latter between the line of City charges and abatement and the line of gross revenue
represents profits to the City above all its current charges. These areas are propor-
tionate to the corresponding amounts of money involved.
On the diagram illustrating Estimate A, that part of the company's net income
above the gross revenue line, extending from 1920 to 1932, inclusive, would have to be
supplied by a charge for transfers. The City's deficit, on account of interest and sink-
ing fund, is shown to continue until and including 1950, and if abatements of payments
now made by company to City are included, the City's deficit would continue until
1955.
On the diagram illustrating Estimate B, the company's net income falls under or
within the line of gross revenue. The City's deficit continues until 1938 without abate-
ments included, and until 1941 with abatements. On this diagram the slope of the
line shows that the gross revenue for the first twenty years of the contract is esti-
mated to increase by a greater amount than it has actually increased during the past
twenty years.
COMPARISON OF ESTIMATES OF FINANCIAL RESULTS UNDER VARIOUS
PROGRAMS OF CONSTRUCTION AND OPERATION
In the course of development of the City's rapid transit plans, estimates have
been made of the financial results to the City for every combination of construction
plans and methods of operation that has been proposed. The results of the principal
of these estimates compare as follows:
7
97
1913 Estimate (Transit Commissioner's Report).
The recommendation of the Transit Commissioner embraced an expenditure of
$41,016,000 by the City, including the Chestnut Street Subway, but without interest
and sinking fund charges during the first year of operation, and $22,896,000 at the out-
set by the company. Under the plan recommended in this report, the company was
to provide funds for the Frankford and Darby elevated lines, the cost of which was
estimated at $10,900,000, including land. The corresponding estimates of financial re-
sults were based upon free transfers between surface and high-speed lines beyond
limits approximately three miles from the business district, the fares of such transfer
passengers to be divided between the City and company according to passenger mile-
age. The company was to be allowed 6 per cent. return upon its investment in the
new system. The maximum annual deficit to the City under this plan was estimated
at $1,280,000, and it was estimated that by the year 1927 the earnings would be suf-
ficient to pay all of the City's fixed charges.
1914 Estimate (Appendix B of Annual Report of Department for 1914).
Under the terms of the program for rapid transit development with universal free
transfers, resulting from conferences between the Director of the Department of City
Transit and the management of the Philadelphia Rapid Transit Company, dated May
27, 1914, many important changes were made. The City's investment under that pro-
gram was estimated at $54,002,000, including the Chestnut Street Subway, but with-
out interest and sinking fund charges during the first year of operation, and the com-
pany's investment $11,996,000. Fares of passengers using both City and company
lines were to be divided equally between City and company. The company was to re-
ceive out of the earnings of the City lines a preferential payment to compensate for
the net income diverted by the City lines, but the City was to obtain certain credits
on this preferential payment, principal among which was the net income estimated as
obtainable from a tube to be built to Camden. Under the operation of this program,
the City's maximum annual deficit was estimated at $1,866,000, and it was estimated
that the deficit would disappear about the year 1935. The preferential payment to
the company under this plan was based upon its net income in the years immediately
preceding the commencement of operation of the proposed rapid transit lines. If the
present large earnings of the company should continue until beginning of operation
of high-speed lines, the preferential payment there proposed, and consequently the
City's annual deficit, would be greater by at least $1,500,000 than the figure then esti-
mated.
1915 Estimate (Appendix of Annual Report of the Department for 1915, Plan No. 16).
In 1915 Councils authorized the construction of the Frankford and Broad Street
lines, extending the Frankford line to Bridge Street, Frankford, to Rhawn Street,
Holmesburg, and continuing the Broad Street Subway northward from Pike Street
to Olney Avenue, with elevated branches to the northeast and northwest as before.
The Department further recommended the addition of the Parkway-Northwest line.
98
These additions to the system, recommended by the Director of the Department,
with operation under the arrangement of May 27, 1914, as modified by a tentative
suggestion embodied in the 1915 Annual Report of the Department increased the
City's estimated investment at the outset to $67,088,000, including the Chestnut Street
Subway, and the company's investment to $15,206,000. The City's maximum annual
deficit was estimated at $2,655,000, and it was estimated that this deficit would dis-
appear about the year 1941. In these figures the northwest elevated branch of the
Broad Street line, although authorized, was not included as its route had not been
determined.
If this estimate be revised to accord with the revised estimate of cost of construc-
tion made in November, 1915, and shown on page 23 of the 1915 Annual Report, the
cost of construction paid for by the City would be reduced to $64,420,000, including
the Chestnut Street Subway, but without interest and sinking fund charges during the
first year of operation, and the City's maximum annual deficit would be reduced to
$2,181,000.
This revision of the construction estimates was made on the strength of the bids
for construction received before November, 1915.
before November, 1915. As compared with the estimate
next preceding, the Byberry line and the northwest branch of the Broad Street line were
added.
1917 Estimate.
The great increase in the cost of labor and materials since November, 1915, is re-
sponsible for increasing the present estimate of City investment to $83,235,000, and
the addition of capitalization of interest and sinking fund charges during the first
year of operation brings the total investment of the City to $87,300,000.
The City's maximum annual deficit under the plan now proposed by the company
is estimated at $5,157,000 in 1932 as per Estimate A, the deficit disappearing in the
year 1955. As per Estimate B the maximum annual deficit is $4,488,000, and the City's
charges are fully earned in the year 1941.
Tabulated Comparison of Estimates.
Placed side by side these estimates appear as follows:
COMPARISON OF ESTIMATED FINANCIAL RESULTS UNDER VARIOUS PROGRAMS OF
CONSTRUCTION AND OPERATION
1913.
1914_
1915
1915 (Revised)
1917____
Year of Estimate
Estimated
Investment
by City
Estimated
Maximum
Annual Deficit
of City
First Year
Showing All
City Charges
Earned
$41,016,000
$1,280,000
1927
54,002,000
1,866,000
1935
67,088,000
2,655,000
1941
64,420,000
2,181,000
1939
87,300,000 A
5,157,000
1955
4,488,000
1941
Includes abatement of payments by Company to City under 1907 Contract.
Cost of construction of Frankford and Darby Lines, amounting to $10,900,000, including real estate
assumed to be borne by Company.
Maximum and minimum limits.
99
>
It will be noted that the estimates of the Department have always indicated a large
deficit to the City in the earlier years of operation. Due to the enlargement of pro-
gram, the present high cost of construction, the increase in guarantee of net income
to the company, and the increase in abatement of payments by company to City un-
der the 1907 Contract, the deficit as shown by the present estimates is much greater
than that originally shown.
METHODS OF PROVIDING FOR CITY'S DEFICITS
In order to compensate or provide for the annual deficits during the early years
of operation of the high-speed lines which, as stated above, amount for a number of
years to over $5,000,000 in Estimate A and over $4,000,000 in Estimate B, various
methods have been suggested, including the following:
1. Personal Property Tax.
By the Act approved by the Governor, June 17, 1913, the State surrendered to the
City one mill on the tax on personal property which had formerly been retained by
the State. This was originally regarded by the Department as available for transit
purposes, but we understand that this tax is now being merged with other City reve-
nue. We estimate this amount for the fifty-year period at $16,700,000.
2. Abnormal Increase of Tax Receipts Resulting from Abnormal Increase of Assessments
Due to Rapid Transit Development.
In the Transit Commissioner's Report of July, 1913, it was considered possible
that after twelve years of subway construction and operation, the abnormal increase
of assessed valuation due to transit development would provide for the City's use addi-
tional taxes of over $3,000,000 per year.
It was formerly assumed by the Department that these estimated additional tax
proceeds would be available to meet the City's deficit in the earlier years of operation.
We understand it is now considered probable that the development of the City, upon
which they are predicated, would require the larger portion of these increased taxes
for the abnormal expenditures by the City for general or usual municipal purposes.
This increased value of real estate is somewhat caused by time-saving produced by the
high-speed lines, the value of which was estimated in the Transit Commissioner's Re-
port at $1,939,000 and over per year as benefiting the traveling public.
3. City Taxes.
On the basis of Estimate A, the entire amount of the City's deficit, without de-
ducting for the excess sinking fund for the fifty-year period as per the Department
estimate, would if averaged equal $2,043,000 per year, which would probably be
equivalent to an average increase in the tax rate of about 9 cents per $100 per year.
This deficit, however, occurs from 1918 to 1954, inclusive, and we estimate would re-
sult, if all paid from direct taxation, to an increase of 18 cents in 1922, increasing to
27 cents in 1926, and disappearing in 1955.
100
Under Estimate B, it would be necessary to draw on the general tax fund only
between the years 1918 and 1940, reaching a maximum of $4,488,000 in 1926, or 24
cents per $100 increase on the tax rate in that year.
4. Issue of City Bonds.
If, as a temporary expedient, it were considered desirable and legally practic-
able to fund the City's deficit of $102,140,000 for the fifty-year period under Esti-
mate A, and if this funding be done in thirty years, 4 per cent. bonds sold at par,
the interest and sinking fund for such bonds less the City's surplus from operation
applicable to these charges for the entire period would be, on an average, $2,566,000
per year, equivalent to an average increase of about 11 cents per $100 on the tax rate
throughout the fifty-year period.
This plan would make it easier for the City to carry the deficit as the higher an-
nual charges on these bonds would come in the later years of the contract when the
income to the City from operation is greater. The net result, however, would be a
considerably greater cost to the City, and such a plan would not seem to be advisable.
If the bonds were issued to cover sinking fund charges only up to the year when
both interest and sinking fund are earned, the bond issue at its highest point would
amount to $25,100,000 under Estimate A, and the interest and sinking fund for the
period of the contract $42,189,000. The City's maximum annual deficit would be
reduced by $813,000.
If, under Estimate B, the sinking fund were provided for by City bonds during
the years of deficit, the bond issue would amount to $14,700,000, and the interest
and sinking fund thereon $26,436,000. The City's maximum annual deficit would be
reduced by $753,000.
5. Deferring Construction of Certain High Speed Lines.
The deficit to the City, shown by Estimate A, is due, to an extent, to the large
investment contemplated in the comprehensive system of rapid transit lines comprised
in the present program. Should it be considered prudent to defer certain of these ex-
penditures until later dates, this deficit would be materially reduced. Assuming, for
example, that it be possible to defer for ten years beyond the dates contemplated the
construction of the North Broad Street Subway north of Erie Avenue (Pike Street),
with its elevated branches, the Parkway-Northwest line, the extension of the Frank-
ford line from Bridge to Rhawn Street, and one track of the Byberry line, the total
deficit to the City during the fifty-year period, we estimate, would be reduced by $12,-
300,000 in interest and sinking fund charges. In addition, there would be a substantial
saving in operating expenses of the combined system.
By so deferring a portion of the construction, the maximum annual deficit of the
City, according to Estimate A, would be $4,925,000 in 1934, as compared with $5,-
157,000 in 1932, and according to Estimate B would be $3,238,000 in 1926, instead of
$4,488,000 in 1926.
Prices are now higher than they have ever been before under the present money
standard. There is no prospect of an early decline, and it is impossible to foretell the
101
course of prices in the future. It is practically certain, however, that they will re-
vert to some extent in the course of time, and the City should delay such part of its
construction program as it can, without impairing unduly the advantages which are
expected to result from transit development. We believe that such a delay will not,
in a broad way, be detrimental, and that by reason of the large saving possible, it
would be for the ultimate good of the City as a whole. The construction of sections
within the congested business district require more time than do the outlying sections,
and we understand that the Department is bending all its efforts to placing the former
under contract. To avoid delay in beginning operation, it will be necessary to let
contracts within a year extending outward from the central section. If prices have
not declined to a satisfactory extent by that time, this work should be carried only
to a distance sufficient to make practical operating lines which will relieve the central
congestion and will, with free transfer privileges, effect as great time saving for all
the people living beyond the temporary termini as for those living near the line. By
such a policy, we believe the City can defer the expenditure of as much as $22,000,000
until such time as lower prices can be obtained. A saving of 10 per cent. on this part
of the construction cost would mean a saving of $110,000 every year thereafter until
the debt is discharged.
To effect this saving it would be necessary to limit contracts let on the present
market to Bridge Street on the Frankford line, Erie Avenue on the North Broad
Street line, Allegheny Avenue on, the Parkway-Northwest line and Oregon Avenue
on the South Broad Street line. In any event, this program, or its equivalent, is all
that can be carried out with the funds at present available.
6. Assessment of Benefits on Land.
As stated in the Transit Commissioner's Report of 1913, it is expected that the
abnormal increase of assessed value, due to construction of high-speed lines should be
over $300,000,000. If the entire cost of construction of high-speed lines were assessed
against this property benefited, it would amount to less than 30 per cent. of the ab-
normal increase. The City has provided for bond issues of $63,000,000 toward the
cost of construction of these high-speed lines. If the remainder of this cost as esti-
mated, namely $24,300,000, be assessed against the property abnormally benefited, as-
sumed at $300,000,000, it would amount to only 8 per cent. of such abnormal benefit,
which would be largely in the nature of unearned increment, or 1.3 per cent. of the
total value of the property, including benefits.
This method of distributing a part of the cost of such public improvements would
appear to be just and equitable, but we understand it is not at present legally prac-
ticable.
7. By Modification in the Dividend Payments of the Company.
(a) If a graded schedule of dividends be substituted, beginning with 2 per cent.
per year for the first seven years of operation of the City's system, 3 per cent. for
the next seven-year period, 4 per cent. for the next seven years, 5 per cent. for the
next seven years and 6 per cent. thereafter, the effect would be as follows:
102
Under Estimate A this plan would practically eliminate the necessity for a
charge for transfers. There would be comparatively little change in the deficit of the
City for the total period or in the maximum annual deficit. Under this estimate
the receipts of the company would be about $6,000,000 less than under the company's
proposal, all of which decrease would be in the early years of the contract.
If this modification be applied to Estimate B, the deficit of the City for the period
would be reduced by $5,670,000, and the maximum annual deficit by $540,000. The
receipts of the company would be $5,670,000 less for the period of the contract.
(b) If the company's capital stock be placed on a parity with the City's invest-
ment in construction as to the division of the net income after all company charges
are paid, the effect would be as follows:
Estimate A
Estimate B
Reduction in City's deficit for period of contract---
Reduction in maximum annual deficit___
$22,315,000
582,000
Reductions in receipts of Company for period of contract.
Average rate of return on Company's capital stock.
30,834,000
4%
$8,817,000 (C)
1,003,000
8,817,000
6.64%
(C) Increase in Surplus.
By this plan there would be no charge for transfers.
8. By Graded Sinking Fund Charges Upon Future Bond Issues.
The constitutional amendment relating to City loans, which was finally adopted
at the election of November 2, 1915, permitted a graded schedule of sinking fund pay-
ments. In the loan bill of June 29, 1916, for $57,100,000, advantage was not taken of
this provision. If, however, this graded schedule can be made use of on bonds issued
for the funds required to complete the original program of construction, the sav-
ing in the earlier years would result in reducing the City's maximum annual deficit
by $114,000, as per Estimate A, or $174,000, as per Estimate B, but there would be
no substantial difference in the total sinking fund charges of the City during the
whole contract period.
9. Raising Rate of Fare.
As provided in the company's proposal, the commission may, on petition, raise the
rate of fare, or impose a charge for transfers for the benefit of the City. The accom-
panying diagram shows the fare required and the result of various schedules of fares
and transfer charges.
Based upon the passenger movement estimated with 5-cent fares and free trans-
fers, charges for transfers or increases in fare would produce the following addi-
tional revenue in the year 1924, when the high-speed lines are in full operation and
the main portion of the City's interest and sinking fund charges become payable out
of revenue:
103
ESTIMATED ADDITIONAL ANNUAL REVENUE THAT MIGHT BE DERIVED FROM VARIOUS
INCREASES IN FARE IN 1924
(Without Reduction in Total Number of Revenue Passengers due to Increase in Fare)
Charges for Tranfers:
Between Surface and High-speed Lines:
1 cent____
2 cents---
3 cents---
Between Surface Lines:
1 cent__.
2 cents___.
3 cents----
Increases in Fares:
On High-speed Lines:
6 cents-
7 cents__
8 cents----
On Surface Lines:
6 cents....
Estimate A
Estimate B
$850,000
$950,000
1,450,000
1,620,000
1,850,000
2,060,000
$850,000
$950,000
1,450,000
1,620,000
1,850,000
2,060,000
2,236,000
2,490,000
3,800,000
4,240,000
4,850,000
5,410,000
3,800,000
4,240,000
In these estimates there is no allowance for reduction of total revenue rides due
to increase of fare. From past experience in Philadelphia and elsewhere, it is certain
that there will be some reduction, but the amount is difficult to estimate.
There is also no specific allowance in Estimates A and B for increase in riding
due to elimination of the exchange ticket charge or for the saving in accounting, print-
ing and inspection expenses of the tickets. These items are small in amount and
impracticable to estimate closely. Estimates A and B are both based on general factors
which take account of details of this character.
From the preceding table it would appear that if there were no reduction in reve-
nue passengers due to increase in fare, a fare of 6 cents on both surface and high-
speed systems would eliminate the City's deficit. By Estimate A this charge would
have to be continued for about eight years, after which a fare of 6 cents for passengers
on the high-speed lines alone would be necessary for about fifteen years.
By Estimate B a fare of 6 cents on both surface and high-speed lines would be
necessary for four years, after which the 6-cent fare on the high-speed lines alone would
have to be continued for about ten years.
If, on the same basis, fares should be adjusted to place the principal part of the
burden on passengers using the high-speed lines, it would be necessary, as per Esti-
mate A, to charge 8 cents, with free transfer privileges on the high-speed lines be-
ginning in 1920, and it would also be necessary to charge 1 cent for transfers between
surface lines for a period of eight years, beginning in 1923. The 8-cent fare on the
high-speed lines would have to be continued until 1930 inclusive, after which 7 cents
would be sufficient for five years and 6 cents for about ten years thereafter, when a
104
straight 5-cent fare, with free transfers, could be established and maintained over the
entire system.
As per Estimate B, in order to cover the City's deficit, a charge of 7 cents, with
free transfer privilege on the high-speed lines would be necessary, beginning in 1921
and continuing for about ten years, after which it might be reduced to 6 cents for about
six years, and thereafter to the 5-cent fare, with free transfers.
The fare necessary from year to year to carry all of the expenses and fixed charges
involved in the proposal of the company is illustrated by the diagram opposite. In
preparing this diagram the estimated expenses and fixed charges were divided by the
estimated number of revenue passengers. Various fare schedules that would cover the
cost of service at various periods are also shown, including the above examples.
This diagram represents the financial results as per Estimate A.
10. By Use of Company's Working Capital for Purchase of Equipment.
Under the Company's proposal we estimate that working capital to the amount
of $5,000,000 will be accumulated before the operation of the unified system begins.
This is to be used in part temporarily for maintaining the company's dividend, but
under the terms of the proposal the draft for such purpose would not continue over
six months, and, therefore, under our Estimate A, not over $1,000,000 would be re-
quired. Not more than $1,000,000 additional should be necessary in the early years
of operation for cash working capital for current operation needs. It would seem feas-
ible, therefore, to devote $3,000,000 out of this working capital to investment in equip-
ment without allowance to the company for interest thereon. Such use of this fund
would operate to reduce the City's annual deficit by about $200,000 per year, and the
total advantage to the City for the period of the lease would be about $10,000,000.
11. By a Combination of Several of the Methods Described.
While it might be burdensome or impossible to meet the entire deficit of the City
by any one of the methods described, it may be practicable to combine several of them
and thus distribute the load.
PREFERENTIAL PAYMENT TO COMPANY OF DIVIDENDS ON STOCK
It is recognized that in large American cities the present 5-cent fare will gen-
erally not produce sufficient revenue to support the expensive construction of high-
speed subway and elevated railroad systems, and that in order to provide these neces-
sary facilities the municipality must assist by supplying at least part of the investment.
In addition to this, it is generally necessary for the municipality to assist the com-
pany in financing its portion of the investment by giving it some preference in the
application of the net income to its fixed charges before the City obtains its return.
The two American cities which have financially assisted rapid transit development are
Boston and New York, in the latter of which the preferential has been allowed.
105
Boston.
In Boston the City, in addition to a large investment in subway terminals for
surface lines, has provided about $16,000,000 for the construction of subways for high-
speed operation. These subways have been leased at rentals equal to the City's inter-
est and sinking fund charges, to the Boston Elevated Railway Company, which owns
and controls practically all the City transportation system. These rentals, in addi-
tion to the fixed charges on the company's investment in these facilities has, however,
proven such a burden that the company has petitioned the Legislature to appoint a
commission to recommend methods of affording relief to the company in order to give
it the financial ability to further develop its service. In this case there is nothing in
the nature of a preferential payment to the company, but it seems probable that no
further rapid transit development can be made at the present time by the company on
the old basis.
New York.
1
The operation of the original subway system in New York City was undertaken
by a company independent of the then existing companies engaged in transportation in
that City. The City's investment in the construction of this system was about $35,-
000,000, and the rental therefor in the amount of the interest and sinking fund charges
was made a first charge on the net earnings. The operation of this subway-elevated sys-
tem was a financial success from the beginning, as it was located in the greatest traffic
districts of any city in the United States, and was mainly competitive to the existing
transit system rather than supplemental. As a result, temporary losses were sustained
by the existing elevated and surface systems.
In the negotiations for the operation of the extensive rapid transit system de-
veloped by the Public Service Commission to supplement the existing high-speed lines,
it was agreed that the new and old systems should be operated in combination in two
separate systems-the first, principally in Manhattan by the Interborough Rapid
Transit Company, and the second, principally in Brooklyn by the Brooklyn Rapid
Transit Company through subsidiary companies. It would have been difficult, if not
impossible, to keep independent income accounts as between the old system and the
new. In order, therefore, to make the pooling of revenues and expenses practicable,
and to facilitate the financing by the companies of about one-half of the investment
required, the City allowed the companies to make preferential deductions from income
primarily to protect the existing net income of the old system.
Philadelphia.
The proposal of the Philadelphia Rapid Transit Company provides that from the
net earnings of the unified system a cumulative dividend of 5 per cent. per annum on
the $30,000,000 of company's stock shall be deducted prior to the division of net in-
come, of which the City's share is 90 per cent. This preferential payment to the
company differs in a number of particulars from the preferentials provided for in the
106
New York contracts, and the following comparison is made so that a thorough under-
standing of the subject may be obtained:
1. Protection of Existing Income of Surface Lines as Well as Subway and Elevated Lines.
The new City-built lines in Philadelphia will divert traffic from the surface lines
and will, therefore, reduce the net income of the present surface system; such loss
being borne by the City under the proposed contract by reason of the preferential pay-
ment. In New York the preferential payments apply only to the net income of the
existing City-owned subway and of the Brooklyn elevated system, and it may be ques-
tioned how much the net income of these systems will be reduced, because the new lines
have been laid out to supplement rather than to compete with them. On the other
hand, the surface lines in both Manhattan and Brooklyn and the Manhattan elevated
system will suffer, by reason of the new rapid transit lines, large losses in net income,
with no protection or compensation therefor. These losses will be sustained in each
case by the holding company, which controls also the rapid transit systems. In other
words, it would appear probable that in New York when all of the new lines are in
operation the preferential payment provided for will be amply earned by the com-
panies protected and will not lessen the City's income. On the other hand, the real loss
by reason of the competition of the new lines will fall upon the surface lines and
Manhattan Elevated Railway system, and thus through the holding companies upon
the real contracting parties.
The principal part of the loss by diversion of traffic to the new lines in Manhattan
will probably fall on the Manhattan Elevated Railway Company and on the New York
Railways Company, which operates the greater part of the surface railways in Man-
hattan. The former is leased by the Interborough Rapid Transit Company and the lat-
ter is under the same control as the Interborough Company.
Practically all of the Brooklyn transportation system, including surface and ele-
vated lines, is controlled or leased by the Brooklyn Rapid Transit Company. In the
contract with the City, made through a subsidiary company-the New York Municipal
Railway Corporation—the Brooklyn Rapid Transit Company receives no protection for
the diversion of net income from its surface lines. The lease from the City to the New
York Municipal Railway Corporation was assigned to the New York Consolidated
Railroad Company, which is another subsidiary forming a consolidation of the ele-
vated railroads in Brooklyn, the stock of which is owned by the Brooklyn Rapid
Transit Company.
In considering the above it should be borne in mind that the portion of the total
traffic which is carried on subway-elevated lines in Philadelphia is much less than the
portion of the total traffic carried on subway-elevated lines in the City of New York.
In order to make the proposed preferential charge in Philadelphia effective, we believe
it is necessary to have it protect the surface lines as well as the high-speed lines.
2. Universal Transfer System Between Surface and High-speed Lines.
The Philadelphia proposal also differs from the New York contracts in that here
a universal transfer system is to be established between the surface and high-speed
107
lines, while in Manhattan there is no transfer of this character, and such transfers are
established in Brooklyn only at a limited number of points. Taking account of the
provision allowing an automatic charge for transfers, this proposed extension of the
transfer privilege in Philadelphia would probably make no reduction in the company's
net income. The unified operation of surface and high-speed lines permitting this uni-
versal transfer will be highly advantageous to the traveling public of the City, and will
also probably be of ultimate advantage to the company.
3.
Comparison of Income Prior to Charging of Preferential.
The amount of the preferential allowed the Interborough Rapid Transit Com-
pany, namely, $6,335,000 per year, was fixed to protect the company's existing annual
net income from operation, out of which it has to pay the charges on its existing capi-
tal investment. This amount was based on the average net income for the two years
ending June 30, 1911, the date of the contract being March 19, 1913. The net income
of the company by fiscal years since 1909 has been as follows:
Years Ending
June 30
1909_
1910__
1911____
1912____
1913__
1914__
1915___.
1916__.
NET INCOME OF INTERBOROUGH RAPID TRANSIT COMPANY
Net Income
$5,405,763
First year of operation of Brooklyn exten-
sion.
Average of these two years used as basis of
preferential.
6,769,572
5,900,423
6,499,294
7,434,662
Contract made March 9th.
8,640,687
8,837,487
9,597,011
It was expected that operation of the new lines would begin January 1, 1917.
In this case the fiscal year preceding operation would have been the year ending June
30, 1916, for which the net income was $9,597,011. It is understood that this net in-
come is still increasing considerably and will probably continue to do so until the open-
ing of the new Interborough lines which has been somewhat delayed. Under normal
conditions this net income should not be reduced by the operation of the new lines suffi-
ciently to fail to meet the preferential charges.
In the case of the Brooklyn (New York Municipal Railway) contract the prefer-
ential payment in the amount of $3,500,000 was based on the estimated average annual
net income from operation of the then existing Brooklyn elevated lines for the two
years ending June 30, 1916, it being expected that the new lines would be placed in
operation January 1, 1917. This preferential, as in the case of the Interborough Com-
pany, is to protect the company's net income from operation, out of which it has to pay
the fixed charges on its existing capital investment. The net income of the Brooklyn
elevated system has been as follows:
108
NET INCOME OF NEW YORK CONSOLIDATED RAILROAD COMPANY (BROOKLYN
Years Ending
June 30
1910
1911_
1912__.
1913___
1914__
1915.
1916___
ELEVATED SYSTEM)
Net Income
Combined net income of constituent com-
panies. Net income adjusted to accord
with maintenance provisions of contract.
Contract made March 9th.
$2,883,000
3,122,000
3,212,600
3,202,400
2,885,386
Net income adjusted as above.
3,265,275
3,924,468)
Estimates for these two years were averaged
to form basis of preferential.
None of the more important of the new Brooklyn lines have been placed in opera-
tion, so that statements of the net income of the combined new and old systems are not
available. Operating through thickly settled districts with lines into and through the
heart of Manhattan Island, the new lines probably will divert a large amount of
traffic from the surface lines, and under normal conditions should produce from the
start more net income than necessary to pay the company's charges on equipment. The
remainder will next be available for the City's charges on construction, and thus when
all of the new lines are in operation the City will apparently run little risk from the
preferential guarantee allowed the company.
For purposes of comparison with the New York preferentials, the annual net
income from operation of the Philadelphia Rapid Transit Company, which it is pro-
posed the City shall protect by allowing the company a preferential of $1,500,000 an-
nual dividends on the company's stock should be combined with the prior charges on
existing capital investment, which, for the year ending June 30, 1916, were $9,794,212.
Therefore, under the company's proposal, the City in effect would at the outset allow
as a preferential charge the sum of these two amounts, or $11,294,212 per year. This
total preferential under the proposal of the Philadelphia Rapid Transit Company will
be increased by the amount of the added fixed charges for future extensions or addi-
tions to the surface systems, which, it should be noted, is not the case in New York,
where the owning companies are obliged to supply capital independently for the sur-
face system.
It will be noted that this preferential proposed by the Philadelphia Rapid Tran-
sit Company to protect the existing income of all lines, surface, elevated and subway,
beginning at $11,294,212, compares with a fixed total of $9,835,000, comprised in the
two contracts made by New York City to protect the subway system in Manhattan
and the elevated system in Brooklyn, and that no protection is afforded by New York
City for the existing income of surface lines.
In Chicago under the operating arrangement between the street railway companies
and the City the net income paid the companies is based upon a percentage return
upon the agreed value of the property of the companies. In New York, however, this
valuation was not made and apparently was not considered in connection with the pro-
priety of granting these preferentials.
As the proposed contract will be made by the Philadelphia Rapid Transit Com-
pany, the probability of earning the fixed charges ahead of the proposed dividend is a
matter of immediate concern to the City.
109
Since its organization, the surplus income over fixed charges of the Philadelphia
Rapid Transit Company has been as follows: (The rental payments to the Union Trac-
tion Company were graded in the early years, reaching the full amount in 1909.)
SURPLUS EARNINGS OF PHILADELPHIA RAPID TRANSIT COMPANY
Years Ending
June 30
1903_
1904
1905
1906____
1907___
1908
1909
1910___
1911__
1912__
1913___
1914____.
1915__.
1916__
1
1.
!!
i
Amount
$405,889
220,849
108,210
303,997
364,048 (Deficit)
92,049 (Deficit)
220,534 (Deficit)
-1,329,723 (Deficit)
415,560 (Deficit)
150,490 (Deficit)
509,583
310,236
221,705
1,672,704
It is understood that officials of the company estimate that the net income for the
year to June 30, 1917, will be over $2,500,000.
In fixing the amount of net income as a basis for such preferential payment cer-
tain standards of maintenance and service must be agreed upon, and these may pos-
sibly be higher than now maintained by the company. The audit which is now being
made under the direction of the City Controller, it is understood, will furnish the data,
if desired, for such a determination.
4. Effect upon the Preferential of the Proposed Automatic Charge for Transfers, Especially
upon the Cumulative Feature of the Preferential.
The proposal of the Philadelphia Rapid Transit Company contains a proviso that
it may automatically put into effect such charge for transfers between high-speed
lines and surface lines and between different lines of the surface system as will pro-
duce an amount sufficient to make up any deficit in the payment of all of the com-
pany's fixed charges and the dividend of $1,500,000 upon its capital stock.
If the company charged 3 cents for such transfers in 1924 it could increase its
net income by an amount of about $4,000,000, assuming there would be no decrease in
riding by the imposition of such charge; consequently, with this provision in force
it is probable that under no circumstances could there be such a decrease in the com-
pany's net income as to compel it to reduce or discontinue the dividends on its stock.
In New York the provision for the preferential is coupled with no permission
to increase the fare or to charge for transfers, and consequently, except for the prob-
able leeway of existing income over the preferential charge, at the time of the open-
ing of the new lines the companies there are taking some chance in immediately obtain-
ing this preferential should there be any great unsettlement in conditions of the busi-
ness.
110
As a matter of fact, for the first two fiscal years of operation of part of the new
Brooklyn lines, from August 4, 1913, to June 30, 1915, there was an actual deficit
in the company's preferentials of $545,413, which will have to be made good from their
net income before payment of City's interest and sinking fund charges.
In the case of the New York companies, by reason of the fixed 5-cent fare, the
cumulative provision of this preferential would seem to be equitable.
With a rate of fare fixed for the period of the contract, the New York companies
are subject in this matter of preferential charges to the possibility of considerable
periodical deficits, due to causes beyond their control, such as abnormal increases in
cost of materials or labor, loss of revenue due to business depressions, great conflagra-
tions, strikes, war, or other calamities.
In the case of the proposed Philadelphia contract, the proposed charges for trans-
fers would seem to protect the company against such losses. It may be pointed out
that the City should have the same right to put into effect a charge for transfers,
or an increased fare, in order to provide for the tendency toward diminishing profit in
the street railway business.
5. Comparison of Amount of Investment by City and Company in the Proposed Rapid Tran-
sit System as a Consideration in Connection with the Preferential Charge.
An important consideration in the establishment of the preferentials in the New
York contracts was that the companies were required to furnish a large amount of
the funds for the construction and equipment of the new lines. This was of great
importance, as the borrowing capacity of the City was not adequate to carry out the
City's construction program. The estimated expenditure of the City on the lines em-
braced by the Interborough contract was approximately $104,000,000, while the com-
pany agreed to spend, on construction as well as equipment, approximately $108,000,-
000. In Brooklyn the expenditure, by City and company, was estimated at approxi-
mately $59,000,000 for each. In both cases the City's expenditure will considerably
over-run the estimates due to the present high cost of construction and to delays in
completion of the work. On the basis of the agreements, however, it will be seen that
the companies agreed to furnish approximately half the money required.
In the Philadelphia proposal, the company will furnish an estimated amount of
$24,773,000, or 22 per cent. of the total.
A comparison of these investments follows:
COMPARISON OF ESTIMATED INITIAL INVESTMENT OF CITY AND COMPANY IN RAPID
TRANSIT DEVELOPMENT
Total
City
City
Per Cent.
of Total
Company
Company
Per Cent.
of Total
Philadelphia (including Chestnut
Street Subway)
$112,073,000
$87,300,000
78
$24,773,000
22
New York:
Interborough
Brooklyn
212,000,000 104,000,000
118,000,000
59,000,000
39539
49
108,000,000
50
59,000,000
영업
​51
50
111
This comparison makes clear that in New York the companies are furnishing pro-
portionately more than twice as much as would be required of the company in Phila-
delphia under the proposal.
MISCELLANEOUS ENGINEERING AND FINANCIAL PROVISIONS
OF THE PROPOSAL
We would reply to the following questions, and advise you as to certain pro-
visions of the proposal as follows:
Proposed Nineteenth Street Station on the Market Street Subway-Elevated Line.
Is the construction of this station desirable from economic, operation and traffic
standpoints?
The company's proposal includes a provision not previously discussed, for the es-
tablishment of a station at Nineteenth Street for Market Street Subway-Elevated
trains. This is stated to be for the purpose of enabling passengers between West
Philadelphia and those parts of the City between Broad Street and the Schuylkill River,
to make use of the Market Street high-speed line.
The cost of making this change would probably amount to about $500,000. The
cost of maintaining the station and of stopping every Market Street train at this sta-
tion would amount to about $16,000 per year. The extra time consumed by the stop
would be one-half minute, which, for the 30,000,000 (approximately) passengers pass-
ing Nineteenth Street on the Market Street line each year at present would amount to
250,000 hours lost. Passengers from North Philadelphia to that part of West Phila-
delphia north of Market Street have direct surface lines by way of Girard Avenue or
Spring Garden Street, while passengers from South Philadelphia have a direct surface
line over the South Street Bridge.
This leaves a comparatively small volume of traffic which would find it advan-
tageous to make use of the Market Street line by way of transfer from the Nineteenth
and Twentieth Streets surface lines, and such a transfer could be made conveniently at
the present Fifteenth Street Station. Transfer passengers from the Seventeenth and
Eighteenth Streets lines would find it more convenient to use Fifteenth Street Sta-
tion than the proposed Nineteenth Street Station.
Passengers from the vicinity of Nineteenth and Market Streets would save a
small amount of time to points in West Philadelphia west of Fortieth Street.
Under the proposal, passengers transferring from the Market Street Subway-Ele-
vated line at the proposed Nineteenth Street Station to the Nineteenth and Twentieth
Streets lines would be extended the special privilege of another transfer to the north
and south lines intersecting the Nineteenth and Twentieth Streets lines. The necessity
and justice of this special privilege is not apparent, and it is generally unwise to intro-
duce such an exception into the operation and regulation of a large street railway
system.
If the proposed Nineteenth Street Station in the future should ever become of
equal importance to the average of all the stations in East Market Street, excepting
112
Eighth Street, Thirteenth Street and Fifteenth Street, the traffic between this station
and West Philadelphia would amount to about 8 per cent. of the total passengers on
the line, while 69 per cent. would lose time by reason of the extra stop. The remain-
ing 23 per cent. of the passengers on the Market Street line are local riders, and would
not be affected by the addition of this station.
The point in question is in the only express run on the Market Street Subway-
Elevated line, and it materially lessens the value of rapid transit service to intro-
duce a stop under such conditions.
From all of the above considerations, we believe that this station should not be
added.
Use of Market Street Tracks East of Thirtieth Street by Darby Line.
Is the track capacity of the Market Street lines sufficient to accommodate the
Darby line until June 30, 1924?
In the estimates, it is assumed that the Darby line will be connected with the
Market Street Subway-Elevated line at Thirtieth Street, and that the Darby trains will
be operated in Market Street east of Thirtieth until about June 30, 1924. By so do-
ing the construction of the Chestnut Street Subway can be postponed four years after
that of the Darby line, as proposed, with consequent saving of $2,000,000 in interest
and sinking fund charges. From this must be deducted, however, the cost of the con-
nection at Thirtieth and Market Streets, which will amount to not less than $100,000.
At present, about 170 cars per hour maximum are operated on the Market Street
line in 30 trains, which is equivalent to two minutes average headway. We estimate
that 217 cars per hour will be required in 1924, or 29 trains of 6, 7 and 8 cars, and
on the Darby line 87 cars, which, with four minutes' headway, would be divided into
15 trains per hour. This estimate of cars is based on using the present 50-foot cars
as far as they go on the Market Street service, and 60-foot cars on the Darby service.
We estimate that with speed-control signals at the most important stations, as many
as 44 eight-car trains can be operated on the Market Street line, which would be
equivalent to 352 cars. The maximum traffic estimated for the Market Street and
Darby lines in 1924 is 28,400 passengers per hour, requiring 304 cars.
We, therefore, are of the opinion that the Darby line can be operated in Market
Street as planned until June 30, 1924, and possibly until the year 1927, if it be deemed
satisfactory to increase the car loading temporarily.
There are many devices and expedients by which the carrying capacity of high-
speed lines can be enlarged, either permanently or temporarily, and the utmost advan-
tage should be taken of them to make full utilization of the large investment in such
railway construction.
Changing Alignment of Market Street Line at City Hall.
The proposal provides that, at the City's option, the high-speed tracks of the Mar-
ket Street line may be carried straight under City Hall, the cost of the work to be
charged to the City's Construction Account. This may be found desirable in the future,
8
113
but we do not recommend such a change until the net revenue to the City under the
proposed contract becomes large enough to support the greater part of the City's in-
terest and sinking fund charges on account of the transit undertaking. This work
would cost about $500,000 at present prices. It would effect on the Market Street line
a saving in running time of about two minutes per round trip, and would afford
greater transfer conveniences between the Market Street line and the Broad Street
and Northwest lines.
Proviso Enabling City to Purchase Company's Stock.
What funds would the City be obliged to raise to exercise the right of purchase
of company's stock at any time during term of contract?
In the 1907 contract, the City was given the right to purchase the stock of the
company at par at the expiration of the contract, and in order to provide the City
with funds therefor a sinking fund, with graded payments, was provided out of the
earnings of the company. We estimate that this fund would amount to $22,000,000 at
the expiration of the 1907 contract, while the capital stock of the company is approxi-
mately $30,000,000.
The company now offers the City the right to make such purchase at any time.
during the term of the proposed contract, and the same schedule of sinking fund pay-
ments provided in the 1907 contract is proposed for the new contract, the payments
beginning five years after the date of the new contract. There will be at June 30,
1917, about $650,000 in this special sinking fund, and including this amount we esti-
mate that the sinking fund balance at the end of ten-year periods during the term of
the contract will be as follows:
1917
1927
1937
1947
1957
1967
ESTIMATED BALANCES IN SINKING FUND
At June 30.
Estimated Balances
$650,000
1,600,000
4,100,000
8,400,000
15,400,000
26,250,000
Amount by which Sink-
ing Fund Balance Falls
Short of Amount Re-
quired to Purchase
Company's Stock
$29,350,000
28,400,000
25,900,000
21,600,000
14,600,000
3,750,000
The last column in the above statement indicates the amount which the City
would have to raise by bond issue or otherwise if it should find it desirable to recap-
ture the property before the expiration of the proposed contract. By such purchase
of the stock of the company the $1,500,000 annual dividends stipulated in the com-
pany's proposal would become available to the City. This amount would pay interest
at the current rate on a bond issue equal to the amount of the company's stock, and
at the same time provide a sinking fund which would amortize the bond issue in forty
114
years. The City would also gain the 10 per cent. of net income of the unified system
retained by the company under the proposal. For the period of the contract this
amounts to $15,958,000 by Estimate A, and $33,041,000 by Estimate B.
Method of Financing Cost of Equipment.
Can the interest rate of 6 per cent. on equipment bonds be reduced?
The company proposes that funds for the cost of equipment shall be provided by
"First Mortgage, Gold, Sinking Fund Bonds, bearing interest at not exceeding six per
centum." It is later specified that the interest and sinking fund on these bonds shall
be payable next after operating expenses, taxes and reserve charges.
In the year 1923, when all the proposed lines will be in operation, the interest on
the cost of equipment is estimated at $1,003,000, and it will be a first charge against
net earnings of $10,988,000.
In the last year of the contract, the interest and sinking fund charges on the cost
of equipment are estimated at $3,198,000, and constitute the first charge against net
earnings of $26,289,000.
These equipment bonds would, therefore, appear to be a safe and high-grade invest-
ment security.
If the equipment were purchased with funds derived from City bonds sold at par
bearing 4 per cent. interest, the saving by Estimate A, as compared with 6 per cent.
bonds, would be 2 per cent., or $556,000 for the year 1928, when the equipment sink-
ing fund charge begins under the proposal, to $1,102,000 in 1967, the last year of the
contract.
By Estimate B the saving would be $574,000 in 1928 and $1,232,000 in 1967.
In preparing Estimates A and B of financial results, it was assumed that these
funds would be obtained on a 5 per cent. basis.
Surface Extensions.
Of what advantage to the City is the proviso that surface extensions may be built
by the City?
The company proposes that, at the City's option, surface extensions may be built
by the City for operation by the lessee on a basis that will "make a net return to the
company at least equal to the rental to be paid upon it," and the rental is specified as
"an amount equal to the interest and sinking fund charges upon the bonds issued to
cover the cost of construction thereof."
It is seldom that a new surface line will meet such conditions until it has been in
operation for several years. As it stands, therefore, this clause would probably not
enable the City to avail itself of the advantage claimed, and surface extensions as re-
quired would have to be made from company funds, with a higher rate of return.
Omission of 5-Cent Limits.
In the company's proposal relating to fare it is specified that "the fare for a con-
tinuous ride between termini of each route of the unified system shall be 5 cents for
115
each passenger," with transfer privileges as subsequently provided. While this is prob-
ably intended to be confined to the present limits of 5-cent fare, the effect of this
clause would be to apply the 5-cent fare to the whole system of the company and the re-
sultant annual loss, which would be at least $500,000 at present, would have to be
borne either by the City in the form of increased deficits or decreased net revenue, or
by the passengers of the whole system by charges for transfers, as provided in the
same paragraph.
This provision would also prevent the City from charging fares greater than 5 cents
on the Byberry Line without the consent of the Public Service Commission. This may
be found desirable as there will be large operating deficits on this line during early
years of operation.
Payment for Equipment.
On page 24 of the company's proposal it is provided that "upon the expiration of
this contract the lessee agrees to vest the title to the equipment in the City, free from
all liens and encumbrances, except those then existing in accordance with the condi-
tions of this contract."
* * *
On page 73 it is provided that "at the expiration of the period fixed
the term of the Contract shall end, without compensation to the Lessee, other than the
payment to the Lessee of Cost of Equipment at that time, and, as provided in Article
XIX, Paragraph 19, the City may use for the purpose of such payment the Reserve
Funds, which become the property of the City at the termination of the Contract."
At the expiration of the lease, the City, therefore, would have to pay the com-
pany the cost of equipment, which is the cost new; but the City would receive the ac-
cumulated depreciation fund for equipment, which would offset the accrued deprecia-
tion on the equipment. It is specified that the reserve funds may be used in making
this purchase, but as they represent accrued depreciation or deferred maintenance,
such use could only be temporary.
* *
* *
On page 59 it is provided that "for the purpose of amortizing Cost of Equipment
during the term of this Contract there shall be set aside out of the Gross Revenue of the
Unified System each year, beginning ten years after the date of the Lease, as a fixed
charge of the Lessee,
an amount equal to 1 per cent. of Cost of Equipment.
Said payments shall be made to the Trustee
As the proposed rental payable to the City is not in a fixed amount, but is 90 per
cent. of the residue of gross revenue after operating expenses, fixed charges of the
company and dividends of the company are paid, the annual charges to this sinking
fund for equipment act to reduce the City's rental, and therefore, in effect, the City
makes the payments into this fund. The fund is in addition to the reserve fund for
depreciation of equipment, and is for the purpose of amortizing the principal or cost
of the equipment, which is to be held by the trustee of the equipment mortgage, and
will be sufficient to retire the equipment bonds at the end of fifty years. The title to
the equipment, however, is provided to remain in the lessee, and, as quoted above,
the City in order to acquire this title at the expiration of the contract must pay the
116
+
company the entire cost of the equipment. Thus the City would pay, first the trustee,
and second the company for the equipment necessary for the high-speed lines, the cost
of which in the first year of complete operation will be $23,246,000, and in the last year
of the contract $53,300,000, as per Estimate A.
This is manifestly unfair, and must be due to inadvertence in preparation of the
proposal. The City should be credited with the amount of this amortization fund and
its interest accumulations, and should pay the company only for any excess of the cost
of equipment above such amounts.
Depreciation Reserve for Construction of City's System.
In the company's proposal, a depreciation reserve for construction of the City's
system is provided before a division of net income. It is specified, however, that if
the City's annual sinking fund charges exceed the amount assumed or determined as
necessary for the depreciation reserve fund for construction there shall be no deduc-
tion for such reserve. The City's sinking fund charges, as fixed on bonds or authorized
for construction, exceed the annual charges probably necessary for depreciation. This
eliminates the deduction for City's reserve, and the City's only compensation for the
deterioration in its property, which is virtually in the nature of operating expenses,
comes after the company has made its 10 per cent. deduction from net income. The
City's sinking fund charges for the period of the lease are estimated to amount to
$42,000,000, and the company's 10 per cent. on this amount is $4,200,000. It would
therefore seem proper to place the depreciation reserve ahead of the company's divi-
dends, and to have it payable to the City to be used either for the renewal of the City's
construction or to apply towards its sinking fund charges. This deduction of deprecia-
tion reserve should be made without regard to the amount of the City's sinking fund
charges.
117
APPENDIX B
THE
1907 CONTRACT
BETWEEN THE CITY AND
PHILADELPHIA RAPID TRANSIT
COMPANY
AN ORDINANCE
Authorizing the execution of a contract between the City of Philadelphia and the
Philadelphia Rapid Transit Company, affecting, fixing and regulating the duties,
powers, rights and liabilities of the City and of the Philadelphia Rapid Transit
Company, and its subsidiary companies, and the relations and respective interests
of the contracting parties, providing for the future management and extension of
the street railway system controlled by the Philadelphia Rapid Transit Company,
and the final acquisition of its leaseholds and property by the City, and repealing
so much of former ordinances as is inconsistent therewith.
AUTHORITY TO CONTRACT
SECTION 1. The Select and Common Councils of the City of Philadelphia do or-
dain, That the City of Philadelphia in accordance with the powers granted by the Act
of the General Assembly of Pennsylvania, approved April 15, 1907, and entitled "An
Act authorizing contracts between cities, boroughs or townships of the one part, and
street passenger railway companies, surface, elevated or underground, or motor-power
companies leasing and operating the franchises and property of such companies, of
the other part, affecting, fixing and regulating the franchises, powers, duties and lia-
bilities of such companies, the management of the same, the relations and respective
rights of the contracting parties, and the ultimate acquisition by such cities, bor-
oughs and townships of the property, leaseholds and franchises of said contracting
companies,” as well as of all other powers inherent in the City of Philadelphia, shall
enter into a contract with the Philadelphia Rapid Transit Company, owner, lessee and
operator of various surface, elevated and underground street railways in the City of
Philadelphia, which shall be in the form following for the purpose of accomplishing
the objects set out in the recitals and covenants therein contained:
Agreement entered into this
CONTRACT
day of
one thousand nine hundred and
seven, between the City of Philadelphia of the one part (hereinafter called the City),
and the Philadelphia Rapid Transit Company, of the other part (hereinafter called the
company).
119
WHEREAS, Beginning about the year 1857 different companies to the number of
upwards of fifty, incorporated by the Commonwealth of Pennsylvania, have been
granted consent by the City to occupy various streets of the City for the purpose of
transporting passengers from point to point along the same, which franchises and
consents have been granted subject to various conditions and restrictions;
AND WHEREAS, These companies were subsequently leased for long terms of years
by traction or motor-power companies, which have installed the electrical system of
propulsion of cars, all of which leases have now, by assignments and various convey-
ances, become vested in the company, which thus controls and operates as one general
system practically all of the street passenger railway companies in the City of Phila-
delphia;
AND WHEREAS, The company has also acquired, through stock ownership and
leases, control of all the franchises which have been granted for the construction of
elevated and underground passenger railways within the City, and has under construc-
tion and in partial operation an elevated and underground railway from the western
end of Market Street, along Market Street to Delaware Avenue, and also has fran-
chises for the construction of a subway on Broad Street and an elevated railway to
Frankford;
AND WHEREAS, The terms, conditions, restrictions and liabilities which have been
imposed upon these various companies (all of which shall be taken as included in the
words "subsidiary companies" wherever the same are hereinafter used) differ widely,
and there is dispute and uncertainty with respect to the effect of many of the provisions
thereof, and it is believed that it is to the interest of the public as well as of the parties
hereto to supersede the former regulations, and to define and regulate the relations be-
tween the parties hereto so as to make them fixed, fair and uniform;
AND WHEREAS, The City should have a voice in the management of the company
and a supervision of its accounts and expenditures;
AND WHEREAS, A large sum of money is required to improve, complete and extend
the present system of the company in order that it shall better serve the public; and
for this purpose it is essential that the position of the company be clearly defined, and
the securities of itself and its underlying properties unquestioned, and its rights to
make extensions in the future assured, in order that it may obtain credit to finance the
increased transit facilities so necessary for the welfare of the public and the develop-
ment of the City;
AND WHEREAS, It is desirable that arrangements should be made requiring the
direct payment into the City Treasury of a fixed sum in lieu of a license fee per car,
and a further sum to represent the cost of maintaining street pavements and caring
for the streets occupied by passenger railway tracks, in order to enable the City to have
control of this municipal work. And it is further desirable that provision should be
made for the sharing by the City in the earnings of the company from further growth
of the City (without in any way making the City liable for any of the obligations of
the company), and the ultimate acquisition by the City of the leaseholds and prop-
erty of the company.
120
NOW THEREFORE, In consideration of the covenants and undertakings herein on
behalf of each party with the other, and the payments to be made by the company to
the City, and the re-adjustment by the City of the obligations of the company, and
the confirming of the rights and franchises of itself and its underlying companies
under the conditions herein contained, it is covenanted and agreed between the parties
hereto as follows:
CAPITAL STOCK OF COMPANY TO BE PAID UP
FIRST. The company shall, by appropriate action within thirty (30) days after
this contract is executed, make a call on its stockholders for the portion of its capital
stock unpaid, which shall be made payable in installments of five (5) dollars each,
the last of which shall be payable not later than December 31, 1908. All of the said
fund shall be expended for the completion of improvements now undertaken, the pro-
viding of new lines, power and equipment, and the general improvement of the transit
system. No further increase of capital stock or funded indebtedness (saving where
the latter is by way of renewal or substitution of or for indebtedness now existing, or
validly incurred hereafter under the provisions hereof) shall be made by the company
or any of its subsidiary companies at any time or for any purpose without the con-
sent of the City, nor shall any further leases, obligations or guarantees be assumed
by the company at any time during the term of this agreement without such consent,
nor shall the company, during said term, part with any of the stocks, leaseholds or
franchises without like consent. And there shall be stamped across the face of all cer-
tificates of stock and leases held by the company notice that the same are held subject
to the terms of this agreement, except securities held in the Fire Insurance Fund of
the company, which may be sold from time to time to meet fire losses or for the pur-
pose of reinvestment.
ADDITIONS AND EXTENSIONS
SECOND. In case at any time hereafter the company shall be desirous of making
any additions to its existing system by the extension of old lines or the incorporation
of new companies, or any additions to its power or equipment, or any betterments to
its lines, power or equipment, the expenditures for which require additional capital
and are properly chargeable to capital account, it shall present a communication to
Councils setting forth the necessity for such extensions, additions or betterments, to-
gether with the estimated and probable cost of the same, and a plan for raising the
capital necessary to cover the expenditures required for the purpose; but no such plan
shall be effective, nor shall the company make any issues of stock or bonds, or incur
any guarantees or liability for the purpose of carrying out said plan until the same
shall receive the approval of the City.
NEW LINES
THIRD. In case at any time in the future Councils shall, either of its own initia-
tive or upon petition of any of the citizens, determine that new lines of surface, ele-
vated or underground railway should be constructed within the City, it shall, by ordi-
121
i
nance, determine the route of such line, and the terms and conditions under which it
shall be built, financed and operated, and the company shall have ninety (90) days
after the passage of such ordinance to take such corporate action as may be necessary
to accept the same, certified copies of which action shall be duly filed with the Mayor
within said period of ninety (90) days; but if the company shall fail to accept said
plan within said period of ninety (90) days, or shall reject the same within said time,
or, after accepting the same, shall fail to enter upon the work in good faith and prose-
cute the same as required in such ordinance, then the City may offer the right to con-
struct and operate said road under said terms and conditions to such other persons, com-
pany or corporation as may be willing to undertake the same: Provided, however, That
any rights acquired by the company under this section, and the section immediately
preceding, shall be subject to all the terms and conditions of this contract with re-
spect to a voice in the management, supervision of accounts, division of profits after
the return of six (6) per cent. upon the capital invested, and the right to ultimately
acquire all the interest of the company at the expiration of fifty (50) years from the
date of this contract: And Provided further, That in the case of the construction of
new lines the capital necessary therefor shall, as far as practicable, be raised upon
bond issues bearing the guarantee of the company as to principal and interest, which
'bonds shall be issued in denominations of one hundred (100) dollars, five hundred
(500) dollars, and one thousand (1000) dollars, and be offered to public subscription,
but in no case shall they be sold for less than par; and to such extent as it may be
impracticable to finance new enterprises upon bonds, or in case additional capital is
needed for the purpose of extensions, additions and betterments to existing lines,
power or equipment, the same may be raised by an increase in the capital stock of the
company, but only with the express consent of the City, and all such increases shall
be full paid at par in cash, and be subject to all the provisions herein contained, with
respect to the original thirty million (30,000,000) dollars of capital stock of the com-
pany,
>
·
1
CITY'S REPRESENTATIVES
FOURTH. The Mayor, ex officio, and two citizens of Philadelphia to be chosen
from time to time by the Councils of said City, to serve for four years and until their
successors are elected shall, as representatives of the City, be members of the Board of
Directors of the company, and, as such, exercise all the powers of directors, and vote
upon all questions which may come before the said Board with like effect as if they
had been duly elected directors by the stockholders of the company, but without in-
curring any liability as directors, and the company shall adopt such amendment to its
By-Laws as may be necessary to give full effect to this provision.
FISCAL STATEMENT
FIFTH. The company shall, on or before the first day of October in each year, be-
ginning in the year 1908, file in the office of the City Controller a full statement of its
receipts and expenditures for the preceding fiscal year, ending June 30th, and the City
Controller shall thereupon examine the books, accounts and vouchers of the company
122
for said fiscal year for the purpose of ascertaining the correctness of the said reports,
and report to Councils the result of such examination.
DIVIDENDS
SIXTH. The company shall not declare or pay any dividends to its stockholders
beyond a return of six (6) per cent. per annum, cumulative from January 1, 1907, on
the actual amounts of capital paid into the treasury in cash, calculated from the date
of the several payments, without at the same time appropriating from earnings and sur-
plus and paying into the City Treasury a sum equal to that portion of the total divi-
dend which is in excess of the said six (6) per cent. return, so that the City shall
share with the stockholders equally in all net earnings properly distributable as divi-
dends over and beyond a return of six (6) per cent. per annum, cumulative from Janu-
ary 1, 1907, upon the paid in capital stock of the company.
BROAD STREET SUBWAY
SEVENTH. The company as the owner of all of the capital stock of the Market
Street Elevated Passenger Railway Company, in which company is vested the right to
build a subway on Broad Street, and an elevated railway to Frankford, does hereby
covenant and agree that the said Market Street Elevated Passenger Railway Company
will surrender and release to the City the right to build said subway on Broad Street,
which surrender the City does hereby accept; and the franchise to construct the said
elevated railway to Frankford is hereby confirmed, and the time for the construction
of the same is hereby extended to three (3) years from the first day of June, 1907:
Provided, however, That the building and financing of said road shall be under and
subject to all of the conditions in paragraph three hereof: And Provided further, That
in case a subway on Broad Street should hereafter be constructed either by the City
or by any other corporation, the company shall make such arrangement relating to the
construction and operation of the same around or under the City Hall, as may be
agreed upon by a Board of Arbitration, one of whom shall be appointed by the City,
one by the company, and the third by the two so appointed, and the decision of any two
shall be binding and conclusive on both parties.
:
FRANCHISES CONFIRMED
EIGHTH. The City hereby confirms to the company and its subsidiary companies
all of the consents, rights and franchises heretofore granted to, and exercised by them,
and each of them, including the right of operation by the overhead trolley system, free
of all terms, conditions and regulations not herein provided for, and does further give
up and surrender and agree not to exercise any rights which it may possess in respect
to a repeal or resumption of any of the said rights now possessed or heretofore
granted, or a taking over of any of said properties, any law, ordinance or contract now
in force, or hereafter passed to the contrary notwithstanding: Provided, however,
That the present rates of fare may be changed from time to time, but only with the
123
consent of both parties hereto: And Provided further, That nothing in this contract
contained shall be construed to limit the power of the City to make all rules and regu-
lations, relating to the operation and management of the lines controlled by the com-
pany, necessary and proper to be made under the police power.
SINKING FUND
NINTH. In addition to the various payments to be made by the company to the
City as herein provided, the company shall establish a sinking fund, to be in the cus-
tody and control of a commission composed of the Mayor of the City, the president
of the company, and the president of the Board of Directors of City Trusts, and
make the following payments into the same, viz.: Beginning with the month of July,
1912, the payments shall be at the rate of ten thousand (10,000) dollars monthly for
a period of ten (10) years, then at the rate of fifteen thousand (15,000) dollars monthly
for a further period of ten (10) years, then at the rate of twenty thousand (20,000)
dollars monthly for a further period of ten (10) years, then at the rate of twenty-five
thousand (25,000) dollars monthly for a further period of ten (10) years, and finally
at the rate of thirty thousand (30,000) dollars monthly for the balance of the term
of this contract. These payments shall be treated by the company as fixed charges
reducing the income applicable to dividends to its stockholders and to the City; and
no dividends shall be payable to stockholders or distribution of surplus earnings made
to the City as long as any such payment shall be in arrears. The said commission in
investing and re-investing the moneys so raised shall be confined to the class of securi-
ties named by statute as proper investments for trustees, except that the stock of the
company may be purchased at a price not above par, and the bonds and underlying
securities may be purchased on a four (4) per cent. income basis, and the commission
shall have the right to subscribe for stock or bonds issued under paragraphs two and
three hereof. Any stock of the company so acquired shall not be resold or reissued.
The commission shall, on or before the first day of October in each year after the es-
tablishment of said sinking fund, file a full and accurate account of the said fund for
the preceding fiscal year of the company with the City Controller, who shall examine
the books, accounts, securities and vouchers relating thereto and report to Councils the
result of such examination. The City reserves the right at any time after the said
fund may have reached the amount of five million (5,000,000) dollars to require by.
ordinance of Councils that the same shall be paid over to the City Treasury and become
the absolute property of the City, at the same time requiring that further payments
toward said fund as provided for hereunder shall be made directly into the City Treas-
ury.
PAYMENTS TO CITY
TENTH. The company shall, in addition to the other payments herein provided
for, during the first full term of ten (10) years next succeeding the date of this con-
tract, pay into the City Treasury in each year the sum of five hundred thousand (500,-
000) dollars in cash; during the second full term of ten years next suceeding the date
of this contract pay into the City Treasury in each year the sum of five hundred and ·
124
fifty thousand (550,000) dollars in cash; during the third full term of ten years next
succeeding the date of this contract pay into the City Treasury in each year the sum of
six hundred thousand (600,000) dollars in cash; during the fourth full term of ten
years next succeeding the date of this contract pay into the City Treasury in each year
the sum of six hundred and fifty thousand (650,000) dollars in cash; during the fifth
full term of ten years next succeeding the date of this contract pay into the City Treas-
ury in each year the sum of seven hundred thousand (700,000) dollars in cash; all of
which said annual payments shall be paid in equal monthly installments upon the last
day of each month, which sums have been fixed, and which payments, when made,
shall be in lieu and satisfaction of all obligations and liability on the part of the com-
pany, and its subsidiary companies, for the paving, repaving and repair of the streets
occupied by their surface lines, the obligation of the companies with respect to the
removal of snow therefrom, and all license fees with respect to the cars run upon said
streets or over the various City bridges or the system of operating said cars, and shall
be in lieu of the right of the City hereafter to impose upon the company, or its sub-
sidiary companies similar obligations or charges; but in case any additional streets
shall hereafter be occupied by the company by reason of additional surface lines or
extensions made under the provisions of paragraphs two and three of this contract,
then the Chief of the Bureau of Highways, Department of Public Works, shall certify
the number of square yards of street paving upon the streets so occupied and the char-
acter of such paving, and there shall thereafter be added to the yearly sum to be so
paid an amount equal to seven (7) cents per square yard of macadam pavement, eight
(8) cents per square yard of asphalt pavement, and six (6) cents per square yard of
other character of pavement on said streets, or in case the company should at any
time with consent of the City abandon the use of any street, then the Chief of the
Bureau of Highways, as aforesaid, shall certify the number of square yards of the va-
rious kinds of pavement upon streets so abandoned, and the annual payment thereafter
to be made shall be reduced in the same manner, at the rates named above. Nothing
herein contained is intended to relieve the company, or its subsidiary companies, from
taxation upon any class of real estate now taxable, nor from taxation on dividends as
provided in their respective charters, nor to effect the matters for which special pro-
vision has been made in this contract. To such extent, however, as taxes and assess-
ments not upon such real estate or dividends may hereafter be imposed upon the com-
pany for the benefit of the City, the City shall credit upon the taxes that may thus be
hereafter imposed all payments made hereunder as well also as the sums which shall
be divided with and paid to the City out of earnings as provided for in clause 6: Pro-
vided, however, That nothing herein contained shall relieve the company from the
obligation to replace or repair pavement removed or damaged by any construction or
repair work which the company may undertake with reference to its tracks or conduits.
RIGHT TO PURCHASE RESERVED
ELEVENTH. The City reserves the right to purchase all the property, leaseholds
and franchises of the company, subject to all indebtedness now existing or hereafter
lawfully created hereunder upon July 1, 1957, or upon the first day of any July there-
125
after by serving six months' notice on the company of its intention so to do, and upon
paying to the company upon the date named in said notice an amount equal to par
for its capital stock then outstanding, to wit: the thirty million (30,000,000) dollars
of capital now authorized plus any additional capital stock issued with the consent of
the City hereunder. The fund in the sinking fund, if not theretofore paid over to the
City, shall be available to the City for the purpose of making or assisting in making
the said payment for the property of the company. This contract shall continue in
force until such right is exercised, but whenever the right is exercised the City shall
succeed to and become the owner, subject, as aforesaid, of all the franchises, lease-
holds, rights, property and privileges theretofore vested in the company, and the City
may either operate the same or lease the right to operate the same for such terms and
upon such conditions as it may deem fit. The rights of the City under this para-
graph shall be assignable and may be put up at public auction to the highest bidder
therefor. The company reserves its franchise to be a corporation with the power to
operate passenger railway systems and may become a bidder for such rights.
DEBTS-CITY NOT LIABLE
TWELFTH. Nothing in this contract contained, and no act lawfuly done by the
City hereunder, shall in any way render the City liable for any of the debts, obliga-
tions or liabilities of the company, unless and until it shall exercise in the manner
aforesaid its option of purchase, nor shall the credit of the City be pledged or loaned
to the company, nor shall it become a joint owner or stockholder in the company, nor
shall the payment to the City of a sum equal to the excess of dividends over and above
six (6) per cent. as hereinbefore provided, be in any way construed as making it a
partner in the enterprise of operating the said system, but said payment is made upon
the conditions of this agreement and is on account of additional taxes, assessments
and obligations which might otherwise be put upon the company by or for the benefit
of the City.
CONSENT OF CITY
THIRTEENTH. Whenever hereunder the consent of the City is required it shall
only be given by ordinance of Councils.
EXISTING AGREEMENTS CANCELLED
FOURTEENTH. All contracts, agreements and bonds existing between the City and
the company and its subsidiary companies are hereby superseded and cancelled, ex-
cepting only the agreement to contribute the sum of four hundred thousand (400,000)
dollars to the City toward the expense of removing certain grade crossings, as provided
in the ordinance of March 28, 1906, and the agreement entered into under the ordi-
nance of April 16, 1906, with respect to the temporary removal of tracks on Twenty-
first Street, and the agreement entered into under the ordinance of June 4, 1906, with
respect to the postponement of the laying of tracks upon Broad Street.
FIFTEENTH. This contract shall take effect as of July 1, 1907, and one-half of
any payments made by the company for license fees for the current year shall be al-
126
lowed as a credit against the first six (6) monthly payments provided for in para-
graph ten hereof.
IN WITNESS WHEREOF, The parties have caused these presents to be duly sealed
and delivered as of, and to take effect the first day of July, 1907.
MAYOR AUTHORIZED TO EXECUTE
SECT 2. The Mayor is hereby authorized and directed to execute, acknowledge and
deliver the said contract on behalf of the City (which contract shall be recorded), and
to fill in the blank left for the date in the above agreement.
SECT. 3. The ordinance entitled "An Ordinance to regulate passenger railways"
approved July 7, 1857, together with all supplements thereto, and all other ordi-
nances and parts of ordinances, and all contracts inconsistent herewith are hereby re-
pealed, cancelled and annulled. This repeal to take effct only upon due execution and
delivery by both parties of the contract provided for in the first section of this ordi-
nance.
Approved the first day of July, A. D. 1907.
JOHN E. REYBURN,
Mayor of Philadelphia.
127
APPENDIX C
INFORMATION IN REGARD TO RAPID TRANSIT FACILITIES IN
OTHER CITIES
New York.
The first contract providing for the construction of subways in New York, dated
February 21, 1900, provided for a lease of fifty years, with a twenty-five year renewal.
The subway was to be built from the proceeds of bonds issued by the city, and the
operating company was to pay a rental equal to the interest on said bonds, plus 1 per
cent.
The second contract, entered into July 21, 1902, fixed the initial term of the lease
at thirty-five years instead of fifty years, as in the first contract.
Each of these contracts made by the city was for the construction and operation
of the road, the equipment being installed by the contracting company at its own ex-
pense. In the case of the second contract, the bid for construction was below the ac-
tual cost of construction, no doubt on account of the value of the privilege of operat-
ing with such a dense traffic which the contract carried.
In 1906 the Legislature enacted radical amendments to the Rapid Transit Act,
authorizing the splitting up of the contract into contracts for construction, equipment
and operation, limiting the length of the lease to twenty years, with a twenty-year
renewal, and requiring that all important acts of the Rapid Transit Board in respect
to the letting of contracts should be subject to the approval of the Board of Estimate
and Apportionment of the city. Bids advertised in 1907 under the provisions of this
Act for construction and operation found no bidders, no doubt on account of the short
term of the lease. Amendments to the Act were enacted as chapter 498 of the laws
of 1909, permitting the Commission to make a contract for such length of term as they
might deem best, with a proviso giving the city the right to take back the road at any
time after ten years upon paying the contractor an amount which, at the beginning,
should not exceed the cost more than 15 per cent., and should gradually decrease
during a specified term, becoming zero at the end of the term.
On September 1, 1910, contracts were advertised for proposals for new subways,
these contracts being in alternative form, one providing for construction, equipment
and operation by private capital upon the basis of the terminal contract plan au-
thorized by the amendments of 1909, and the other providing for separate construction
only of sections of the work. No proposal was received for construction and opera-
tion by private capital, but a large number of proposals were made for construction
alone.
On March 19, 1913, the so-called dual subway contracts were executed, the last of
which have been made in New York providing for subway construction. These con-
9
129
tracts provide for more than doubling the rapid transit facilities at a combined ex-
pense on the city and the companies in excess of $350,000,000.
Contract No. 3, with the Interborough Company, contained the following main
provisions:
1. The company agreed to equip the lines proposed for operation by it in
the report of June 5, 1911, at an estimated expense of $22,000,000, to contribute
$58,000,000 toward the construction, and when constructed and equipped to main-
tain and operate such new lines for a term of forty-nine years in conjunction with
the existing subway systems for a single 5-cent fare.
2. The title to equipment, which is to be provided by the company at its own
expense, vests in the city upon its provision subject to the lease.
3. The leases of the existing subways (Contracts Nos. 1 and 2) were leveled
so that the subways constructed under those contracts and the new subways will
fall into the city's possession at one and the same time.
4. The new lines are subject to recaption at the end of ten years, in accord-
ance with the provisions of the Rapid Transit Act. This recaption may be exercised
either directly by the city or through a new contractor. Provision was also made
for exchanging part of the new subway lines for part of the old, so that in the
event of recaption the city may take over a complete east side or a complete west
side line.
5. The so-called Belmont tunnel, extending under Forty-second Street and the
East River to the Borough of Queens, was turned in as a part of the system at a
valuation of $3,000,000.
6. The receipts from existing and new subway lines are to be pooled, and
from the gross receipts of both lines there is to be deducted and paid, in the order
named, deficits to be cumulative with compound interest:
(a) Rentals payable to the city under existing subway contracts, taxes,
operating expenses exclusive of maintenance, an amount equal to 12 per cent. for
maintenance exclusive of depreciation, and depreciation.
(b) A sum to be retained by the company amounting to $6,335,000 per an-
num, representing the average annual income received by it from the operation of
the existing subway lines and equipment for the two fiscal years ending June 30,
1911.
(c) A sum to be retained by the company equal to 6 per cent. per annum
upon the new investment of the Interborough Company in the new lines, esti-
mated at $80,000,000, or $58,000,000 for new construction and $22,000,000 for new
equipment.
(d) To be paid to the city the interest and sinking fund upon the bonds is-
sued by the city for the construction of new lines, and, in addition, such further
sum as will bring the payments to be made to the city up to an amount equal to
8.76 per cent. upon its expenditures.
130
(e) Contingent reserve fund.
(f) Any amount remaining to be divided equally between the city and the
company, share and share alike. If revenue shall be insufficient to meet deduc-
tions, deficits are to be cumulative, and payment of such deficits shall be made in
full before deducting the amounts required in the contract following the particular
deductions as to which there has been such deficit.
The main points in the arrangement with the Brooklyn Rapid Transit Company
(Contract No. 4), the contract being entered into with the New York Municipal Rail-
way Corporation, a company specially formed for the purpose, were the following:
1. The company agreed to equip the lines proposed for operation by it in
the report of June 5, 1911, to contribute $13,500,000 toward the construction
thereof, and when constructed and equipped to maintain and operate such new
lines for a term of forty-nine years, in conjunction with the existing railroad sys-
tem of the New York Consolidated Railroad Company, for a single 5-cent fare.
2. The company to expend approximately $26,000,000 in third-tracking and
extending its existing lines.
3. The new city lines and also the third tracks and extensions of the existing
lines to be subject to recaption at the end of ten years, in accordance with the pro-
visions of the Rapid Transit Act. This recaption may be exercised either directly
by the city or through a new contractor.
4. The receipts from the existing system and the new subway lines to be
pooled, and from the gross receipts of both lines there are to be deducted and
paid, in the order named, deficits to be cumulative:
(a) Rentals of leased property used in operation and provision for deprecia-
tion and renewals, taxes, operating expenses exclusive of maintenance, an amount
equal to 12 per cent. for maintenance exclusive of depreciation, and depreciation.
(b) A sum to be retained by the company amounting to $3,500,000 per an-
num, representing the average annual income of the New York Consolidated Rail-
road Company from the operation of its existing lines.
(c) A sum to be retained by the company equal to 6 per centum per an-
num upon the investment of the company in the new lines.
(d) To be paid to the city interest and sinking fund charges upon bonds is-
sued by the city.
(e) Certain sums, if found necessary, for additional equipment, additions
and contingent reserve fund.
(f) Any amount remaining to be divided equally between the city and the
company, share and share alike. If revenue shall be insufficient to meet deduc-
tions, deficits are to be cumulative, and full payment of such deficits shall be made
before deducting amounts required in the contract following the particular de-
duction as to which there has been such deficit.
131
5. Future extensions required by the city may be added to the new city
system, and will be equipped and operated by the company as part of the entire sys-
tem under a separate accounting system.
It appears, therefore, that of the total $350,000,000, which will be expended upon
the new system, the city will contribute about $184,000,000, to be expended in subway
construction upon lines to be owned by the city. Toward the cost of such lines the In-
terborough Company will contribute $58,000,000, and the New York Municipal Railway
Corporation about $14,000,000. The cost of additional construction upon the elevated
railroads, as well as that of the new equipment for both subways and elevated lines,
will be borne by the companies, although the equipment for city-owned lines will be
owned by the city. At the time the dual contracts were signed, it was estimated that
the Interborough would spend about $35,000,000 on construction and equipment of
privately owned elevated lines, and about $22,000,000 for equipment of city-owned
lines; and that the Brooklyn Company would expend about $21,000,000 for elevated
construction and about $26,000,000 for equipment. On these estimated with the re-
vised estimate of city expenditures, the total contribution of all parties for new work
on the dual system will be as follows:
City of New York...
•
Interborough Rapid Transit Company.
New York Municipal Railways Corporation
$184,000,000
105,000,000
61,000,000
The revised estimates indicate that the city's expenditures will be increased over
the original estimates by over $20,000,000. The indications are that the companies'
expenditures will also be increased substantially over the original estimates, but re-
vised figures are not yet available.
The sums contributed by the railroad companies for the construction of the dual
system are fixed in amount, the city bearing the remainder of the cost of construction,
including any excess above the estimated cost.
Under this plan the companies earn their present income and 6 per cent. upon the
new money provided by them before the city obtains a return upon its investment.
In addition to the above, the city of New York has already invested about $56,-
000,000 in the construction of the existing subway, and the Interborough Rapid Tran-
sit Company reports that it has expended about $48,000,000 in equipment of the same
line. When the dual system is completed, therefore, the city will have invested in
rapid transit lines about $240,000,000.
Chicago.
A commission of engineers reported, on December 15, 1916, to the City Council of
Chicago with reference to a unification of the surface and elevated lines in that city
and the construction of subways. The plan proposed contemplates a total expendi-
ture of $100,000,000 within the next nine years, and of a total of $275,000,000 ulti-
mately, in the construction of subways and in extensions of elevated lines, purchase
of new equipment, provision of additional power, etc.
132
At present the four elevated lines in Chicago are operated as one system, with free
transfers. The surface lines are also operated in the same manner, but there is no
transfer between the elevated and surface lines, except by the payment of an addi-
tional fare. The proposed plan contemplates a merger of all lines and unified opera-
tion, with retention of the present free transfers between surface lines and between ele-
vated lines, and a proposed charge of 2 cents for a transfer between surface and rapid
transit elevated or subway lines.
It is suggested that the net receipts, after paying all operating expenses and
taxes, should be used as follows:
(a) To pay to the city a return on all city funds invested in the property at the
same rate of interest as that actually paid to the corporation on the new money simul-
taneously invested by it.
(b) To pay to the corporation the actual interest charges paid by it on all new
money invested in the property.
(c) To pay to the corporation a 6 per cent. return on the estimated present
value of the surface and elevated lines.
(d) Five years after the beginning of unified operation, to begin payments to the
regular amortization fund, the payments to this fund increasing from year to year.
The balance of net earnings to be divided, 55 per cent. going to the city and
45 per cent. to the corporation.
(e)
It is recommended that the franchise should provide that "no burdens, either by
orders for the construction of new lines, by the imposition of additional taxes, or any
other requirements on the part of the city, should so reduce the corporation's share of
the divisible net receipts that it would fall in any one year below 1 per cent. of the
gross receipts."
This plan does not state in what order these payments from net receipts shall be
made, but it evidently assumes that such receipts will be large enough to leave a bal-
ance to be divided under (e). Should such fail to be the case, as may well occur, the
recommendation in this report would be indefinite; hence it is recommended that the
priority of these payments should be "left for determination in the drafting of the
ordinance." This report, therefore, avoids the question as to whether the corporation
or the city shall receive its first return.
The report further recommends that if, in any year, the total net receipts of the
corporation from items (b), (c) and (e) exceed 7 per cent. on its average invest-
ment, a division shall be made with the city as follows:
On all return between 7 and 8 per cent., the corporation to receive two-thirds and
the city one-third; on all return between 8 and 9 per cent., the corporation to receive
one-third and the city two-thirds; the corporation to receive no return over 8 per cent.
Thus, if earnings were 8 per cent., the corporation would receive 7 2/3 per cent., and
the city 1/3 of 1 per cent.; if earnings were 9 per cent., the corporation would receive
8 per cent. and the city 1 per cent.
133
APPENDIX D
DEPARMENT OF LAW
OF THE
CITY OF PHILADELPHIA
FEBRUARY 26, 1917.
Legality of Proposed Contract Between the City of Philadelphia and the Philadelphia
Rapid Transit Company
WILLIAM S. TWINING, ESQ.,
Director of City Transit,
Bourse Building, Philadelphia.
DEAR SIR-I acknowledge the receipt of your letter of February 21st, wherein
you ask the opinion of this Department as to whether or not the suggested contract
now pending in Councils between the City and the Rapid Transit Company is legal,
and whether or not there are elements of a partnership therein which are prohibited
by the Constitution of the State of Pennsylvania.
I have carefully examined the terms of the contract, which must be regarded in
three distinct points of view:
1. The financial aspects of the contract, which have relation to certain pecuniary
obligations of the City, and with regard to which this Department can express no
opinion, for that is a subject-matter to be dealt with by Councils alone.
2. The method of operation, with all of the details incident thereto, as to which
this Department can form no opinion, because this phase of the matter belongs to the
Department of City Transit.
3. As to the legal elements involved in the contract, which is the one aspect of it
to which I address myself, the Constitution of 1874, Art. IX, Section 7, provides as
follows:
"The General Assembly shall not authorize any county, city, borough, town-
ship or incorporated district to become a stockholder in any company, association
or corporation, or to obtain or appropriate money for, or to loan its credit to, any
corporation, association, institution or individual.”
The Act of Assembly, approved 1907, P. L. p. 80, authorizes contracts between
cities, boroughs or townships, of the one part, and street passenger railway companies,
surface, elevated or underground, or motor power companies leasing and operating the
franchises and property of such companies, of the other part, affecting, fixing and regu-
lating the franchises, powers, duties and liabilities of such companies, the management
135
of the same, the relations and respective rights of the contracting parties, and the ulti-
mate acquisition by such cities, boroughs and townships of the property, leaseholds and
franchises of said contracting companies.
The contract between the City of Philadelphia and the Rapid Transit Company,
dated July 1, 1907, was entered into in pursuance of the Act of Assembly above quoted,
and which contract is now in force. The contract now suggested is amendatory of the
contract of 1907 between the City and the Transit Company in certain essential par-
ticulars, but it adopts and follows the contract of 1907, otherwise than as amended by
the contract now under consideration, adding, of course, many new features to the
earlier agreement, as the increased complexity of relations between the City and the
company obviously makes necessary.
The question was raised, after its adoption, whether or not the contract of July
1, 1907, between the City and the Transit Company was in violation of the Constitu-
tion of the State of Pennsylvania, especially in view of the partnership obligations al-
leged to have been created between them by it, but the Supreme Court, in the case of
Brode, Appellant, vs. City, 230 Pa. 431, decided that the contract of 1907 was a valid
one for the City to enter into, and was not a partnership contract within the meaning
of the law; and that it did not for that among other reasons in any way violate the Con-
stitutional provision herein before referred to.
There is no Constitutional direction which prohibits the City, in express terms,
from entering into a contract of partnership, though the Constitutional objection does
forbid the City from lending its faith and credit to any corporation, association, in-
stitution or individual. That an intimate connection between a city and a company
or companies of this character is not violative of the Constitution is assumed in the
illustrative Act of Assembly approved the 17th day of Jnue, A. D. 1913, P. L. 520,
which was an Act
"Empowering cities of the first class to purchase, lease, locate, construct, and
equip, or otherwise acquire transit facilities, and to own, maintain, use and op-
erate the same within their corporate limits, and within the limits of adjacent
cities, boroughs and townships; to exercise the right of eminent domain in con-
nection therewith, and prescribing the manner of ascertaining the damages sus-
tained in connection with such exercise; to sell, pledge or lease transit facilities;
to grant licenses for the use of the same; to enter into agreements for the construc-
tion and operation of the same; to connect the tracks of railways with the tracks
of railroad or railway companies, and under certain conditions to use portions of
the tracks of the latter; and empowering railroad, railway and motor power com-
panies to sell, purchase and lease transit facilities to and from said cities, and to
contract with said cities respecting the acquisition, construction, operation and
use of transit facilities."
The contract in question is based on the terms of this Act, and of that of 1907;
and the queries present themselves whether or not the broad scope of the Act of 1913
in any way violates Section 9 of the Constitution recited above, and whether the agree
ment proposed is within the permissive terms employed by the Legislature. That Act
was passed in order to meet the very question that now confronts the City, and so as
136
to enable the building and operation of the high-speed lines. Without some such stat-
ute it would be impossible for the City, at this time, either to build or to enter into
the operation of the municipally owned transit system in the manner suggested, or,
perhaps, in any other manner.
Section 2 of the Act provides as follows:
"It shall be lawful for, and the right is hereby conferred upon, cities of the
first class of this Commonwealth to purchase, lease, locate, construct and equip,
or otherwise acquire, transit facilities, or any of them; and to own, maintain, use
and operate the same within their respective corporate limits and within the
limits of adjacent cities, boroughs and townships: Provided, Such right shall
only be exercised by any of said cities, within the limits of adjacent cities,
boroughs and townships, subject to the consent and approval of the proper
authorities of such adjacent cities, boroughs and townships, lawfully empow-
ered to regulate, or to consent to the construction, maintenance and operation
of such transit facilities therein: And provided further, That such right shall
not be exercised within the limits of any public park or parks, without the con-
sent and approval of the authorities vested with the power to regulate the use of
said park or parks."
Section 3 provides:
"It shall be lawful for, and the right is hereby conferred upon, cities of the
first class of this Commonwealth to sell, pledge, or lease transit facilities, or any
one or more of them, and to grant licenses for the use of transit facilities, or any
one or more of them, or any part thereof, to any corporation or corporations duly
authorized and empowered, under the laws of this Commonwealth to use or operate
the same; also to enter into agreements for the construction or operation, or for
both the construction and operation, of such transit facilities, or any one or more
of them, by any such corporation or corporations, upon such terms and conditions,
including the prescribing and fixing of rates for transportation, as the councils of
such cities shall determine: Provided, No such lease, license, or operating agree-
ment shall be for any period longer than fifty (50) years: Providing further, That
no such agreement for the construction of such transit facilities, or any one or
more of them, or any part thereof, shall be made or entered into, unless the same
provides that work on such construction shall begin within eighteen months from
the date of said agreement, and be completed within a fixed time designated in said
agreement: Providing further, That no agreement for the leasing, licensing, using,
or operating transit facilities or any one or more of them, or any part thereof, to
any individual, copartnership or corporation, shall be made or entered into, un-
less said agreement provides that the actual use or operation of such transit facili-
ties, or any one or more of them, or any part thereof, shall begin within a definite,
fixed, and reasonable time."
It is apparent that the contract now under consideration can only be regarded upon
the theory of a unified contract for the operation of the transit facilities of the com-
pany and those to be provided by the City in mutual connection and dependence, and,
in fact, as one entire system; and I find nothing in the statutes already mentioned to
prevent this method of operation, and much of the language thereof which, at least by
implication, seems to authorize it.
137
I have carefully examined all of the provisions of the suggested contract, which
proposes to reaffirm the contract of 1907, except as the latter is to be changed by the
new agreement. Section 12 of the contract of 1907 provides specifically that:
"Nothing in this contract contained, and no act lawfully done by the City
hereunder, shall, in any way, render the City liable for any of the debts, obliga-
tions or liabilities of the company, unless or until it shall exercise in the manner
aforesaid its option of purchase, nor shall the credit of the City be pledged or
loaned to the company, nor shall it become a joint owner or stockholder in the
company, nor shall the payment to the City of a sum equal to the excess of divi-
dends over and above six (6) per cent., as hereinbefore provided, be, in any way,
construed as making it a partner in the enterprise of operating the said system,
but said payment is made upon the conditions of this agreement and is on account
of additional taxes, assessments and obligations which might otherwise be put upon
the company by or for the benefit of the City.”
The proposed contract does not use those words, but they must be regarded as
written into it, because they are an essential part of the 1907 contract, which the new
contract does not in this respect in any way modify or alter. I think, therefore, that
they are, in effect, carried forward into and virtually made a part of the proposed in-
strument; and I fail to see how the latter can justly be considered as establishing a
partnership or any analogous relation between the parties to it unless these expressions
are distinctly overriden by some of the other terms and provisions thereof. Moreover,
to avoid any question as to this, the language of Section 12 of the agreement of 1907
may be embodied in the pending contract.
I do not see how the City can be regarded as a partner, notwithstanding the pro-
visions enumerated in the contract as to the method of payment before any sum is to
be paid to the City. Part of the contract has specific reference to equipment, and Art.
XVI of the proposed contract, under the title of "Method of Financing," provides:
"The cost of all equipment items which the lessee is required to provide here-
under, in connection with the completion and operation of the City's system, shall
be provided for and represented by an issue by the lessee of first mortgage gold
sinking fund bonds bearing interest at and not to exceed six per centum. Said
issue of bonds may be made by a first lien upon all parts of the completed rapid
transit facilities furnished by the lessee under the head equipment and all re-
placements thereof and substitutions therefor and upon all the interests of the
lessee under this contract and lease, and shall remain such a lien until discharged
and satisfied through the operation of the sinking fund or otherwise; and in order
to further secure the same, the City further agrees that it will not itself issue
any bonds, nor will it permit any other party or lessee to issue any bonds, which
shall be a lien upon the structures so equipped by this lessee, or which shall be a
prior claim upon the earnings of the said structures, but the interest and sinking
fund charges upon the bonds hereunder shall, in each year after the first year of
operation, be the first lien and claim against the net earnings of the unified sys-
tem as prescribed in Article XIX, paragraph 3 hereof, and in case, in any year,
the said net earnings should not be sufficient to meet said payments, the deficit
shall be made up out of the current net earnings of subsequent years, so that no
138
application of net earnings from the unified system shall be made for any other
purpose until current interest and sinking fund payments upon said issue and all
arrearages thereof from former years have been met."
This section of the contract must not be confounded with those dealing with the
use of bonds by the City for which the City is liable and which are to run for a period
of fifty years. It is true that during the years of construction and for one year there-
after the interest and sinking fund charges are to be taken out of the principal of the
sum so borrowed, and thereafter will become a charge on the taxpayer. The proposed
contract does not, in any way, interfere with that arrangement, but, on the contrary,
any receipts which may accrue to the City from the operation of the lines of the two
systems, and which are to be run as a unit, would go to relieve the burdens of the tax-
payers—a burden which, in any event, is bound to arise and from which there can be
no subsequent escape.
Section "C," Art. IX, under the head "Equipment," provides that such equipment
is to be furnished by the lessee at its own expense, a charge which shall not in any way
conflict with the obligations of the City for the construction of the high-speed lines.
An essential feature of the lease or contract is that the City's share of the proceeds
of operation is postponed until that of the Rapid Transit Company is first provided
for, the latter including the several funds set apart for maintenance, replacement and
various other uses, and further including rental and interest upon all the present and
prospective leases or obligations of the company for every purpose. The City, how-
ever, issues its own bonds to finance the construction of the new lines, and, save in the
sense of such postponement of its returns to those of its associate in the enterprise,
it cannot be said to lend its credit in a Constitutional sense to the latter, or as a muni-
cipality to guarantee the company's liability on any of its undertakings now or here-
after existing. It is true that these fixed charges and other obligations are first pay-
able out of the fund, but there is no specific agreement binding on the City which, in
any way, would compel it to reimburse the company, except out of future receipts, for
any of the said charges, should they not be earned. The only obligation assumed by
the City is that its income from the running of the cars is not to be paid out of the
gross revenue until after these fixed charges and other obligations are met.
Finally, provision is made for the joint participation of the parties in the balance
of the receipts after all of the company's claims under the contract are satisfied, if any
such balance shall remain; this division being on the basis of 90 per cent. to the City
and 10 per cent. to the company.
In the peculiar circumstances appertaining to this proposed contract and in the
light of the very broad provisions of the Acts of 1907 and 1913, I do not believe that
such an inference would here arise, but, rather, that the arrangement in view, if agreed
upon by the parties and approved by the Public Service Commission, as it must be in
order to become effective, would be regarded as legalized by those statutory provisions,
and as within the legislative purview in enacting them.
A careful examination of the lease does not, in my judgment, show that it com-
mits the City to any of the liabilities or responsibilities of the Transit Company, and
139
no burdens are placed on the City which violate the law should it be deemed advisable
to enter into this contract.
I do not deem it a contract of partnership, whereby the City lends its faith and
credit to the corporation as prohibited by the Constitution, or as exceeding the power
conferred by statute.
You further ask whether or not the legality of the contract could be tested in the
Supreme Court before its consideration by the City. The Supreme Court would not
entertain the question until the contract should be entered into and passed upon by the
Public Service Commission.
Yours very truly,
(Signed) JOHN P. CONNELLY.
140
APPENDIX E
REPORT OF THE
THE
SPECIAL
SPECIAL COMMITTEE ON RAPID TRANSIT
NEGOTIATIONS MADE TO THE BOARD OF DIRECTORS
AT ITS ADJOURNED MEETING, THIS DAY
WEDNESDAY, DECEMBER 20, 1916
The Special Committee on Rapid Transit Negotiations desires to report the result
of its conferences and the formal recommendation that the following letter be to-day
submitted to the Mayor and the Joint Committee of Select and Common Councils of
the City of Philadelphia.
To the Mayor and Joint Committee of Select
and Common Councils of the City of Philadelphia.
GENTLEMEN: The Philadelphia Rapid Transit Company proposes that a contract
for the operation of the City's high-speed lines shall be undertaken by it under the fol-
lowing general terms, which, if acceptable to the City, can be incorporated in a con-
tract drawn in definite terms so as to adequately protect the interests of both parties
thereto in every respect.
The Taylor plan covers an elevated from Front and Arch Streets to Bridge Street,
Frankford; an elevated from Thirtieth and Market Streets to Darby; a subway in
Broad Street, with branches and with a delivery loop; and a subway-elevated line
from City Hall to Roxborough via the Parkway, Twenty-ninth Street and Henry
Street. It provides that the Rapid Transit Company shall equip these lines, exten-
sions thereof and other lines built by the City, and operate them in conjunction with
its own lines as one system, granting free transfers at intersecting points, so that the
citizens would get the fullest possible benefit from this great expenditure by the City.
Heretofore the condition of the Rapid Transit Company was such that it was pro-
posed that the receipts of the two lines should be kept separate, and the Rapid Transit
Company protected by a so-called preferential payment to the extent that its earnings
were diverted to City lines. The great improvement that has taken place in the fin-
ancial condition of the Rapid Transit Company makes this plan no longer necessary,
as the Company is to-day making on its own system a greater amount than it is will-
ing to accept as an assured fixed share of the profit from the joint operation of the
two systems. Its surplus applicable to dividends for the current calendar year, with
the month of December estimated, will be very close to $2,400,000, or 8 per cent. upon
the full paid capital of the company.
TERMS OF OPERATION AND DISTRIBUTION OF EARNINGS
The company, therefore, proposes that the two systems should be operated as one
—financially as well as physically, all payments, charges and credits between the City
141
and the company to be eliminated, and the gross receipts from such operation to be
applied to the payment of:
1. The actual cost of operation of the combined system.
2.
The fixed charges of the company.
3. A cumulative dividend of 5 per cent. upon the actually paid in capital
stock of the company.
4. Ten per cent, of the remaining net surplus from operation to be paid to
the company and the remaining 90 per cent. to be the annual current net revenue
to the City from the operation of the City-built lines and paid into the City
Treasury as such, within the meaning of the recent amendment to the Constitu-
tion.
i
{
Insofar as may be necessary, the 1907 contract to be amended so as to cover this
distribution of net surplus earnings and the company to waive all claim for back divi-
dends due to it thereunder.
The company has earned a substantial surplus which, at the close of its last fiscal
year, was in excess of $2,700,000, the cash balance at the same date being approximately
$3,000,000, out of which it has since distributed a dividend of 2 per cent., or $600,000.
It has added substantially to that surplus during the last five months of operation.
Until it assumes actual operation of the City's lines under the proposed contract it
will limit its dividend distributions to 5 per cent. per annum from July 1, 1916, and
will carry over into the new arrangement, as working capital, all surplus which it
may have acquired at that time.
The contract shall reserve to the City the right at any time to purchase the com-
pany's property or outstanding capital at a price equal to the par of such stock, with
dividends accumulated and unpaid during the term of this contract, and may use the
sinking fund accumulations for that purpose. The City may also, at any time during
the term of the contract, take back the municipal properties under a fair recapture
clause.
+
FREE TRANSFERS
Exchange tickets shall be abolished at the earliest practicable moment and free
transfers given on surface and highspeed lines outside the delivery district as recom-
mended in the report of the Director of City Transit for 1915. The company will
forthwith. remodel its Nineteenth Street Station on the Market Street Elevated, and
will make it a stop for high-speed trains and establish a transfer at that point with
the Nineteenth and Twentieth Street lines, with a further transfer thereon in order to
give to passengers between West Philadelphia and either North Philadelphia or South
Philadelphia an opportunity to make the journey on the high-speed lines and for a
single fare, thus relieving a discrimination that would otherwise exist in favor of
Frankford, and giving adequate high-speed service to the district tributary to the Nine-
teenth Street Station.
All payments into the City Treasury under the 1907 contract and for tax on divi-
dends of subsidiary companies to stop at the time exchange tickets are abolished. The
142
present sinking fund under the 1907 contract to remain in the hands of the Commis-
sioners, and payments into the same to be resumed five years after the date of the ex-
tension of said contract as provided therein.
The system shall be operated with a five cent fare, but provision shall be made for
such readjustments of fare at any time during the term of the contract, as may be
necessary to protect and secure the return to the company as specified herein, and
necessary and advisable in the interest of the City for any unforeseen reason or con-
tingency.
EQUIPMENT OF CITY LINES
The company will undertake to equip and operate the City lines when and as built
after the City has obtained a Certificate of Public Convenience. The form of security
to be issued by the company, to cover the company's contribution for construction and
equipment of City's lines, to be the best compatible with the interests of both parties.
CAPITAL REQUIREMENTS FOR COMPANY'S SYSTEM
The company will undertake to obtain $19,500,000 of new capital as and when
required for the future requirements of its own system. If obtained by the payment
of the unpaid portion of Union Traction stock, the company will be permitted to
amend its lease with that company, so as to pay a rental equivalent to five dollars a
share upon its full paid capital. If obtained by an issue of Union Traction preferred
stock, or Philadelphia Rapid Transit preferred stock, or on any other form of security,
there shall be allowed a return of 6 per cent. cumulative thereon as one of the fixed
charges of the company.
It has been suggested that the City might, from time to time, offer to build feeder
or surface lines, which would be reasonably remunerative, and rent them to the com-
pany on a 5 per cent. basis. If this were done, fifty-year bonds issued by the City to
cover the cost, would not count against the City's borrowing capacity, and the rental
paid the City would meet the interest and sinking fund requirements of such bonds.
Thus, the City would ultimately become the owner of such lines free of debt.
This suggestion, which meets with our approval, should, we believe, receive your
consideration.
TIME OF TAKING EFFECT
The contract shall be executed and take effect as soon as it secures the approval of
City Councils, the Public Service Commission and the stockholders of the Philadel
phia Rapid Transit Company. The fifty-year period of operation and the fifty-year
extension of the 1907 contract shall run from the beginning of operation of the first
of the City-built lines.
The 1907 contract shall be so amended as to conform with the terms of the new
contract.
The plan, as proposed, has to recommend it definiteness, fairness and a promise of
immediate advantage to the citizens in the elimination of exchange tickets. The City
secures the best possible operator for its system, with a free interchange of passengers
143
between privately owned lines and municipal high-speed lines a result never before
attained in any city. All complicated accounting is avoided, and while the stock-
holders of the company take a 5 per cent. fixed return upon their actual cash capital,
in addition thereto they retain a sufficient contingent interest in the success of the
joint enterprise to insure a careful and competent management on their part.
We bespeak on your behalf and by the public generally a careful consideration of
this offer.
Approved:
Respectfully submitted,
PHILADELPHIA RAPID TRANSIT COMPANY,
T. E. MITTEN, President.
E. T. STOTESBURY,
Chairman, Board of Directors.
144
APPENDIX F
In the 1915 Annual Report of the Department of City Transit, the former Di-
rector makes certain recommendations, No. 9 of which (page 111 of the 1915 Annual
Report) is as follows:
"No. 9. The bill, printed in full in Appendix "K," prepared by the Depart-
ment, providing that cars should be through-routed between lines built and owned
by cities of the first class and lines built and owned by corporations within cities
of the first class, should be introduced in the Legislature at the next session.
"The enactment of this bill is most important, as explained in the text of this
report."
The text of the report referred to above (page 27 of the 1915 Annual Report)
reads as follows:
"In order to improve the City's position to pursue its policy of transit de-
velopment, the Department prepared a bill providing that cars shall be through-
routed between railways built and owned by cities of the first class and those
built and owned by private corporations within cities of the first class. This right
is particularly desirable in the case of the Frankford Elevated Railway, which,
as authorized, extends from the northeastern part of the City only to Front and
Arch Streets. If the City cannot lease this line to the Philadelphia Rapid Tran-
sit Company on satisfactory terms, the City will be obliged to build an extension
through or into the central business district. The proposed bill would have made
it possible to secure a connection and through operation with the Market Street
Subway-Elevated line absolutely without prejudice to the interests of the Phila-
delphia Rapid Transit Company. This bill also would have insured the construc-
tion of branches or extensions to the surface system of the Philadelphia Rapid
Transit Company which may be required in growing sections of the City. Under
present conditions, the franchise for any proposed additional street railway track-
age in the City must first be offered to the Philadelphia Rapid Transit Company.
If that company declines the franchise, the City may offer or grant it to other
interests. In most cases, no company other than the Philadelphia Rapid Transit
Company could accept such franchise, for most of such extensions would be short,
and passengers on such lines, in order to reach other parts of the City, would be
required to change cars and pay another fare.
"The bill further provided that in such cases of through-routing reasonable
joint rates should be established. The Public Service Commission was to be em-
powered to require the establishment of through routes and joint rates, and to fix
the apportionment of joint rates in case the parties thereto were unable to agree.
10.
145
"This bill was introduced in the Legislature on March 22, 1915, and was re-
ferred to the Judiciary General Committee. It was never reported out of commit-
tee. The full text of this bill is given in Appendix 'K'."
1
The text of the "Through-routing Bill," as it appeared in the 1915 Annual Report
of the Department, is as follows:
"A SUPPLEMENT
"To an Act approved the twenty-sixth day of July, Anno Domini one thousand
nine hundred and thirteen, entitled 'An Act defining public service com-
panies, and providing for their regulation by prescribing and defining their
duties and liabilities; prescribing, defining and limiting their powers and regu-
lating their incorporation, and to a limited extent regulating municipal cor-
porations engaged or about to engage in the business of public service com-
panies; creating and establishing a public service commission for the regula
tion aforesaid; prescribing and defining the powers and duties of such com-
mission and its officers, including the exclusive power to regulate the con-
struction, alteration, relocation or abolition of the crossings of railroad cor-
porations, street railway corporations or other public service companies, and
of public highways by the tracks or other facilities of said companies; pro-
viding for the ascertainment by the commission of the expense and damages
resulting from such construction, alteration, relocation or abolition, and for
the payment of such expense and damages severally or proportionately by
the public service companies interested, the state or municipal corporation
concerned, and giving persons whose property is thereby taken, injured or de-
stroyed authority to sue the Commonwealth for damages in such cases; pro-
viding for the terms, salaries and compensation of the members of the com-
mission, its officers, counsel and employees; prescribing and regulating the
practice and procedure before such commission and upon appeal and judicial
review of its orders and determinations by the courts of common pleas, and
giving the court of common pleas of Dauphin County exclusive jurisdiction of
such appeals in certain cases and of all injunctions, mandamus or other ap-
propriate proceedings to enforce the provisions of this Act and the orders of
the commission, and to restrain such orders subject to an appeal to the Su-
preme Court; prescribing penalties, fines and imprisonment for the violation
of the provisions of this Act and for the violation of the orders of said com-
mission; making it the duty of the Public Service Commission to enforce the
provisions of the Act approved the ninteenth day of June, one thousand nine
hundred and eleven, entitled 'An Act to promote the safety of travelers and
employees on railroads by compelling common carriers by railroad to prop-
erly man their trains' by amending Section 9 thereof; repealing the Act ap-
proved the thirty-first day of May, one thousand nine hundred and seven,
which provided for the appointment of the Pennsylvania State Railroad Com-
146
mission, and Sections 1 and 2 of the Act approved the fourth day of June,
one thousand eight hundred and eighty-three, entitled, 'An Act to enforce the
provisions of the seventeenth article of the Constitution, relative to railroads
and canals'; and an Act entitled, "To provide the maximum car service
charges, including car storage charges that railroad companies and corpora-
tions or associations may charge and collect on each car loading, and not un-
loaded within the free time for unloading cars; and fixing the free time that
shall be allowed for unloading cars, approved twenty-fourth day of May,
Anno Domini one thousand nine hundred and seven; and the proviso of
clause three and the provisos of clause seven of section thirty-four of an Act
entitled 'An Act to provide for the incorporation and regulation of certain
corporations,' approved the twenty-ninth day of April, one thousand eight hun-
dred and seventy-four; and all other legislation inconsistent with or supplied
by this Act'; providing for switch and other connections between the lines
of street railway companies and railway lines owned, leased or operated by
municipal corporations, when required by the Public Service Commission;
providing for the establishment of through-routes and joint rates over such
connecting lines; and prescribing and defining the duties of the Public Serv-
ice Commission relating to such connections, through-routes and joint rates.
"SECTION 1. Be it enacted by the Senate and House of Representatives of the
Commonwealth of Pennsylvania in General Assembly met, and it is hereby enacted
by the authority of the same, That it shall be the duty of every street railway cor-
poration in this Commonwealth to construct and maintain, whenever the com-
mission may require the same, such switch or other connections with or between
its line or lines of railway and lines of railway owned, leased or operated by any
municipal corporation, where the same is reasonably practicable, to form a con-
tinuous line of transportation and to cause the conveyance of persons and prop-
erty to be without unreasonable interruption or delay, and to establish through-
routes and service therein and just and reasonable joint rates, fares and charges
applicable thereto; and shall not discriminate in the said rates, fares, charges, or
in any rules or regulations applicable thereto between any such connecting lines.
"SECT. 2. That the Public Service Commission shall have power to require
street railway corporations to construct and maintain such switch or other con-
nections with and between their lines of street railway and lines of street rail-
way owned, leased or operated by municipal corporations as are reasonably prac-
ticable and as the commission shall deem necessary and proper for the service,
accommodation and convenience of the public; and shall also have power to es-
tablish through-routes and joint rates and classifications for the conveyance of
persons and property over said connecting lines whenever the street railway and
municipal corporations concerned shall have refused or neglected voluntarily to
establish such through-routes and joint rates and classifications; and to prescribe
the just terms and conditions under which said through-routes shall be operated.
"The commission shall, in case of failure of the street railway and municipal
·
་ ན་
147
corporations concerned to agree among themselves upon the division of the cost
of construction, maintenance and operation of the connections thus provided for,
or the allowance to be made for the interchange of service, or the apportionment
of any joint rates, ascertain and by order prescribe and fix the equitable and just
apportionment and division of the same.
“SECT. 3. All acts or parts of acts inconsistent with the provisions of this Act
are hereby repealed."
148
UNIVERSITY OF MICHIGAN
3 9015 07375 9147
}