estimated that should all the proposed increases be granted this amount would be increased by $22,000, making a total of about $180,000 per annum. Based on the existing prices to the public of the receivers, transmitters, and induction coils the value per set may be taken at $5.30, or, assuming that the petitioning company bought them in large quantities at a discount, we will say $5. Adding 10 per cent for excess sets, covering stock on hand, instruments, used by operators, private branch exchange switchboards, etc., the cost would be $5.50 per set, equated to each station. A fair rental on same, including repairs, depreciation, insurance, administration, and return, is estimated at $1.13 per station, and this sum has been accepted by various Commissions. On the basis of the company owned stations in Virginia as shown by the evidence, the annual payment would amount to $91,816 for rental on these telephone sets alone. Assuming 2 per cent as the cost of getting money there would be an additional charge of $40,000 per annum on Virginia requirements. As will be seen hereafter, the Commission is not allowing the proposed rates, and the payment under the 4 per cent agreement will be considerably reduced; but figuring for the moment on the full proposed rates for convenience in using the figures already given, we will see that there is something less than $50,000 to be assigned for telphone engineering, laboratory work, investigations and use of patents.

The company has suggested that it has not in this case claimed the usual or any value for promoters' remuneration and that on this, with the cost of money, at an allowance of 10 per cent of reproduction cost new, as decided in Maryland and elsewhere, an annual return at 8 per cent would be $128,000, which added to the rental of instruments would more than cover payment under the license agreement. The company has further suggested that on account of its contractual relation with the Western Electric

Company it saves a further sum to the Virginia Company approximating more than $100,000. The Commission does not make these allowances, nor fix any sum in connection therewith.

In view of the circumstances, the Commission is of the opinion that The Chesapeake & Potomac Telephone Company of Virginia has a contract with the American Telephone & Telegraph Company in this licensee arrangement which is of the great value

to it and which saves it a large amount of expense which would otherwise be incurred if it attempted to operate independently.

[20] We cannot, however, agree that a percentage arrangement is a scientific or satisfactory way of determining the amount of compensation. When rates go up as a result of increased wages and cost of material, the payment to the parent company goes up in proportion. We believe that the Bell interests should devise some plan of presenting to rate-making bodies greater details of the cost of rendering this service, allocated on some understandable plan.

We do not, therefore, disallow this item of expense and we withhold definite approval thereof at this time. We cordially concur in the proposal made by the Indiana Public Service Commission in its opinion in Re Central U. Teleph. Co. P.U.R. 1920B, 813, 844, "that the entire question of the 4 per cent allowance be submitted to joint study by the American Telephone & Telegraph Company and the National Association of Railway and Utilities Commissioners, acting for the various Commissions of the country, in order that this important question may find uniform solution throughout the country."

Contract with Western Electric Company.

By virtue of a contract between the Bell Companies and the Western Electric Company, which is under the same ownership, practically all supplies are purchased through the latter company. They are furnished at substantially cost, plus about 6 per cent. The Western Electric Company sells in competition to other telephone companies and it is stated that the prices obtained by the Bell Companies and the prices obtained by outsiders show that there is a marked difference in favor of the parent company. Such supplies as are not manufactured by the Western Electric Company are purchased by them in quantities and resold to the Bell group as needed.

It would appear, therefore, that while the Western Electric Company sells its supplies in the open market in competition with other supply houses, and cannot, therefore, change the public exorbitant prices, it can and does furnish to the Bell people, by reason of sales in large quantities, their supplies at possibly 30 per cent less than other telephone companies are able to buy

them from the same people. Nothing has appeared to indicate a conclusion other than that the contract with the Western Electric Company is very advantageous to the Chesapeake & Potomac Telephone Company of Virginia.

Depreciation.

The Company presented statements showing the annual expense of depreciation and administration applied to plant in service and office furniture and fixtures as of July 30, 1919, at 6.502 per cent. At the hearing on February 24, 1920, an additional statement was placed in evidence (Gretz Exhibit No. 7) showing a revised calculation of depreciation based on the company's experience at 5.98 per cent.

Mr. Botz, the Commission's accountant, found that according to the books the annual credit to the reserve to provide for depreciation during the period January 1, 1915, to July 31, 1919, averaged approximately 5 per cent of the average plant in serv-. ice, and he stated that the depreciation actually realized during the same period and extended to October 31, 1919, was a considerably smaller percentage. He, therefore, concluded that the allowance of 5 per cent was not inadequate. On cross-examination counsel for the company endeavored to show that because of war conditions, resulting in the inability to secure material and labor, and in the pressure of construction incident to the conflict maintenance had been greatly deferred and that a large amount. of repair work is very much behind.

It is in evidence that during the years taken into account by Mr. Botz, the earnings of the company were insufficient to enable it to put aside money for the depreciation reserve in amount equal to the company's estimate of depreciation. The District of Columbia Commission arrived at a lower percentage, but the matter is still in issue there, and in its recent decision the Commission still holds the depreciation rate in abeyance. No doubt in the district, where the population is nearly all urban, the depreciation is less than in Virginia because of the larger relative amount of conduit construction.

the

However that may be, the Commission is of the opinion that company's experience will show a gradual reduction in the necessary annual depreciation. That is partly what the 4 per

cent payment is for-to develop more durable materials, which will wear out less rapidly. A sufficient time has not elapsed since war conditions to warrant the Commission adopting finally the 5 per cent basis suggested by Mr. Botz, nor do we, on the other hand, believe that the 5.98 per cent basis claimed by the company is fully warranted under changed conditions as to improvement in materials. Inasmuch as no full rate of return is claimed or can be earned under the order of the Commission in this case, it is unnecessary to approach any more closely to a definite percentage of depreciation at this time.

Labor Conditions.

The developments of the past few years have made a tremendous change in all labor conditions, and this is especially striking in reference to telephone operations. Some years ago the services of young women and girl operators could easily be secured for attractive work at low wages. The war changed all this and the pressure of most sorts of manufacturing resulted in calling young women into industry at attractive wages, and the calling of men to war widened the field of female labor. This has almost disrupted the personnel of telephone operating forces, which continues, notwithstanding cessation of hostilities, because of a general shortage of labor.

It is stated that prior to the war the average operating labor turnover of telephone companies—that is, changes in operating force was less than 25 per cent per annum. During the calendar year 1919 the average loss from the operating force at the exchanges in Virginia was not less than 112.7 per cent as shown by the following table:

P.U.R.1920F.

Losses from Operating Force.

January 1, 1919, to December 31, 1919-State of Virginia.

90.61

The table on page 100 (Gretz Exhibit No. 5) shows the in- . creased wages granted to employees, amounting on the average to per cent increase between May, 1914, and September, Some advances in wages have taken place since that time. easy to be seen that this labor condition is one of the most potent factors in the very large increase of operating expenses.

1919.

It is

The telephone company must go into the open market and bid' for labor and must pay what it costs. It is an incident of the times which must be reckoned with.

P.U.R. 1920F.

་