New Britain Herald Newspaper, September 1, 1927, Page 9

S indicated in recent newspaper ad- vertisements, this Company is about to make various changes, eflective next month, in its rates for telephone ser- vicein certain We cannot expect that those of our cus- tomers who are affected will be pleased at this news. We do entertain the hope, however, that with due knowledge and understanding of the conditions underlying the changes, they w cept our action as essential and of good faith. The purpose of this statement is to set forth certain significant facts and to ex- press our readiness to furnish any further information to those who may desire it. nges. The Fundamental Question UR business is being conducted to- day at an actual though small mar- gin above requirements for xpenses, taxes, interest, and dividends. Moreover, the number of customers grows larger cach year. The natural question, therefore, is: If the Telephone Company is now earning even a slight margin of profit per customer, why does not this growth tend toward a larger aggregate margin instead of intro- ducing a financial proble The starting point of the answer to this vital question is found in the fact that tele- phone service is the only utility or commo- dity in the world which depends for its value to the user upon the extent to which it is purchased by others. Every other item of home or bu s equipment is sclected for the value that it holds in itself. But a single telephone is of no value in itself; it acquires the minimum value when it can be connected with one and only one other telephone; and this value becomes grac ally enhanced as connections to other tele plones are made possible. The telephol customer, seeking the full value of his s vice, very properly expects provision potential connection between his own tele phone and that of any other customer, ne or far. As applied to exchange service, this provision for complete inter-connection can readily be understood by first visualizing the initial telephone exchange as a single unit of equipment with one operator in at- tendance, and by then taking note of what must be accomplished as the exchange grows. In the course of time a second unit and a second operator become necessary. Naturally, the customers connected into the second unit wish to be able to talk with those connected into the first unit and vice versa. Fach unit must, therefore, be so equipped that either operator may connect any two of the total number of customers. Similarly, when a third unit becomes neces- sary, each of the three operators must have the same connecting facilities as the other two — and so on as units are added to the switchboard from time to time. This inter-connection of the several units of a complete switchboard is accomplished by duplicating the switchboard terminals of all customers” lines again and again throughout the switchboard at such inter- vals that the entire range is within reach of each operator. It is clear, therefore, that as the original one-position unit grows into a switchboard of many units, the amount of central office equipment per customer is unavoidably increased through the many and costly duplications of line terminals which are required to provide for complete inter-connection. But this is not all. In the larger ex- changes, the time comes when all units of a complete switchhoard will no longer suffice for the telephone growth. A second central office, and later a third, fourth, etc., INCREASE IN TELEPHOT similar to the first, must be established. According to the varying possibilities of cconomical arrangements ‘with respect to buildings and outside plant, these addi- tional offices are housed sometimes in the same building and sometimes in separate buildings designed and constructed for the purpose. In either case, additional space must be provided for them; prompt, com- p]r-tc inter-connection between any two cus- tomers of whateser units must be made possible; inter-office cables must be installed to connect the various switchboards togeth- er; each central office must be equipped not only with its regular switchhoard but also with a supplementary board where calls from the other offices are received and com- pleted; and additional operators must of course be employed to handle these trunked calls. These requirements have even a more marked effect upon the cost of central office cquipment per customer than has the expan- sion of a single switchboard, yet they are absolutely essential to the provision for complete interconnection which the cus- tomer fairly expects. While much of detailed explanation could be added, we believe that enough has been stated to demonstrate that the tele- phone business differs {from general busi- ness in the economic relation between ex- pansion and financial results under constant prices; or, in other words, that the telephone business is unique because the addition of cach new customer builds up the multiplic- ity of connections that must be available to all, and thus tends to increase the cost of plant and operation per telephone. This adverse tendency, however, does not necessarily imply that repeated rate advanc- es will be required through the indefinite future. In considerable measure we have Leen able to offset this tendency by devel- opments in the art and by improved meth- ods and practices in the conduct of the business. Tn fact, for many years prior to the World War we were able to do even more, and our rate history of those years is one of voluntary reductions. The pres- ent exigency results not alone from the tendency inherent in the business but in large part from another factor which is discussed under the following caption. The Effect of Increasing Costs T the beginning of the World War the Company had been in business for thirty-five years, and had gradually in- stalled a substantial amount of plant and equipment at the relatively low costs which prevailed during that period. At the close of 1916 the plant investment was $121.65 per telephone. Since that time the higher post-war prices have necessarily been paid not only for all new plant required for growth but for the replacements of the old low-priced plant worn out and removed from time to time. As a result, the plant investment per telephone was $167.61 at the close of 1926, and according to our five- year forecast will approximate $203.00 in 1931. It is pertinent that while the increase in plant investment per station for the ten- year period between 1916 and 1927 was 37.8%, the increase in telephone rates for the same period was on the average only Growth in Plant: Past, Present, and Predicted DOZEN or more years ago we consid- ered that a budget of $2,000,000 for gross plant additions constituted a sub- stantial program for a single year. For the last five years the average expenditure for such additions slightly exceeded IMPORTANT FACTS _I Increased rates will become effect- ive next month. Not all exchanges in Connecticut will be affected by these rate increases. Not all classes of service will be affected in all exchanges in which rates will be increased. Increases will be made i et for local exchange service only. Rates for toll service will not be affected. Every telephone subscriber, whether to business or residence service or bLoth, will be notified by mail during the present week whether or not his or her rate is to be increased. and if so, to what extent. 85,000,000 per vear. According to the general forecast that we regularly maintain for five years ahead, the aggregate re- quired during that period to provide for an expected growth of 85,000 telephones will be 42,600,000, or nearly as much as the total plant investment of the Company at the close of 1926 after forty-four years of operation. In the larger exchanges, old buildings are enlarged and new buildings are constructed to house the various cen- tral offices of the area; many of the smaller exchanges, for which a single room and the simplest of equipment once sufficed, come to require separate fireproof builc and all the equipment attributes of city ex- changes; experience demonstrates the merit of dial service for certain types of exchang- es; cable replaces open wire not only in the Jocal plant but in much of the toll plant; in short, the provision of facilities for ex- panding and improving telephone service 1s constantly going forward in every direc- tion. All this is as it should nificant not only of the greater public ac- ceptance of and dependence upon the telephone as a vitally essential utility, but also of the responsibility which attaches to us to plan and build accordingly. Our desire and obligation to keep all rates as e; yet it is sig- low as sound business prudence will permit cannot be divorced from the primary obli- gation to provide ample facilities and ade- quate service. Financial Results: Past, Pres- ent, and Predicted OR many years, under act of Congress, the accounts of the Company have been kept according to the system prescribed by the Interstate Commerce Commission; and for no year during that period have the net carnings been as high as 6.5% upon the actual investment in telephone plant. For 1925 the return was at the rate of 6.37%; for 1926 it was at the rate of 6.21%; for the first six months of 1927 it was at the rate of 5.97%; and under the general fore- cast for the next five years it continues to average less than 6% even after giving effect to the impending rate changes. The Southern New England Telephone Company has operated the telephone ser- vice for Connecticut continuously since 1882. During that entire period of forty- four yeats it has accumulated a surplus of $2,000,155, or an average of $15,458 per year. In terms of property investment, the Company stands to-day as 1,000,000 institution, doing an annual business in ex- cess of $14,000,000. Yet in no year of its existence has it earned in Undivided Profits an amount exceeding $410,000, and . MORAN OF THE SITUATION WHICH NECESSITATES AN its annual retumn to stockholders has aver- aged almost exactly 67. So much in answer to the possible and natural question as to whether the earnings of the Company reflect unfair exactions upon its customers. Some Comparisons INCE 1914, certain telephone rates have been advanced, certain have re- mained un ged, and certain have been reduced. The average of all these changes discloses an advance of approximately 19%. 1 the same period, according to the of the National Industrial Confer- Joard as this is written, the cost of living has advanced 65%. ence | By resolving each of these advances into the relative worth of the present dollar as mpared with that of 1914, it becomes evi- that the present dollar will buy 84 cents’ worth of telephone service but only 61 cents’ worth of those things which com- prise the cost of living. Stated in another way, the rates for tele- phone service, measured in terms of wages or of prices of materials or of the cost of living, are actually lower to-day than ‘in 1914, Surcly this comparizon evidences that we have sought no undue margin of profit and that the conduct of the business has been economically progressive. The Increased Value of Tele- phone Service HE foregoing has dealt mainly with the problems and performance of the Company under service expansion. It now may not be amiss to comment briefly upon the development of service value to the customer. After giving effect to the proposed 1anges, our rates will differ but little {rom 1se of 1902 — twenty-five years ago. At 1e close of that year the Company was pro- iding service to 20,760 telephones in Con- ecticut; to-day the same company is pro- riding service to 280,000 telephones within arca. The quality of service, while never as good as we strive to make it, is undoubtedly superior to that of twen- ty-five years ago. We leave with you, therefore, the answer as to whether or not the service developments of this period have brought to our customers an enhanced value unreflecied in telephone rates. 16 same How the Rates Will be Changed AI.TH()U}H each subscriber is being advised directly as to such rate changes as are being made in the exchange with which he is connected, it may be ap- propriate to state here the general charac- ter of the proposed reyision. Except for the correction of two rates which are clear- ly discriminatory and which apply to a relatively small number of customers, the substance of the revision is a re-grouping of exchanges by rates in accordance with present and probable variations in size. Basically, the present classification, con- sisting of six rate groups, has remained practically unchanged for more than twen- ty-five years. During that period the num- ber of subscribers in each exchange has, of course, increased greatly; but the rates of erowth Lave differed widely. As a conse- quence, ecertain exchanges which now bear little relationship to one another in the num- ber of telephones or in the cost of render- ing service are still grouped together. It is obviously unfair to continue to apply the same service rates to two exdlanges, for example, which at onc time had approxi- [E RATES mately the same number of telephones, when to-day one connects twice or three limes as many customers as the other. To correct this condition, we are re-classifying the 71 exchanges of Connecticut into 11 rate groups. Under this re-classification the rates will be changed in varying degree in 38 exchanges. In 33 exchanges no changes are being made except to correct the two discriminatory rates referred to above. No changes are being made in toll rates, A Summary HERE is no magical resource in the onduct of the telephone business. La- bor and materials must be obtained at cur- rent prices. Public recognition of the increasing value of telephone service is responsible for the great growth of the business. To meet this demand, we must construct more and more telephone plant, for which new capital is constantly re- quired. Capital in turn must be secured from the investing public. In return for this capital, investors are entitled to fair wages in the form of interest and divi- dends. To pay fair wages for capital we must have adequate earnings. We cannot have adequate earnings without adequate rates for service. Therefore, we must ask the public to pay rates for service which will enable us to eamn a reasonable return upon our property. The re-classification of exchanges for rate purposes, with an in- creased rate in certain of these exchanges, stands as the fairest and most logical re- source for the additional revenue required at this time. In our last annual report to stockholders, we stated: “In this matter of rates the con- cern of the patron is that of obtain- ing the best and the most service for the least payment that can con- sistently be required. The concern of the Company is that of obtain- ing through fairly apportioned charges an aggregate revenue suf- ficient to provide for adequate ser- vice and to maintain the business in a sound and healthy financial con- dition. Both of these requisites are entirely justifiable and our rate policy is based upon full accept- ance of them.” We have only to add that no ultimate good can come from rates that are unfairly high or unfairly low. * In the changes that we are about to make, we seek nothing be- yond a proper balance of rates between exchanges of varying size, and an aggre- gate revenue suflicient to maintain the modest margin of the past few years, with such freedom of action as will enable us to go forward with projects and develop- ments that will bring the best and the most of telephone service value. To Our Customers To us you stand as our only resource for patronage and good will. Of all our busi- ness problems, the most distasteful and disheartening are those which involve con- troversy with our patrons. We have writ- ten the foregoing as evidence of good faith in the step which we are about to take. If you find it obscure or unconvine- ing, we earnestly urge that you give us the opportunity for further explanation, to the end that the business relations between us may be maintained with mutual friendli- ness and confidence. James T. Moran, President. THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY TS S~ s e e