Every public utility must be in possession of the natural re source upon which that industry is based. A gas or electric com pany must have possession of sites for the location of its. works; a transportation company must have rights of way and terminal sites. These properties must have strategic locations. Limitation in the choice of this agent of production tends to make the cost of acquiring or leasing these facilities greater than it would be if the industry had a wider range of choice. Furthermore, utilities must make allowances in advance for probable increase in the required capacity. For these reasons utilities are provided with the governmental power of eminent domain which makes possible the compulsory sale of private property. Thus the law recognizes that, socially considered, these properties are being put to the highest uses of which they are capable.
A utility which has assembled its plant and thereby incurred heavy construction costs of a "fixed" character anticipates that the product can be sold at a profit. If expectations are not realized the utility will suffer a pecuniary loss because the government has not generally undertaken to secure the utility against such risks. It is therefore highly important that each enterprise take into account the economic principle of proportionality which requires that enterprises be so planned that the maximum of physical output may be secured at the lowest possible money cost and that this maximum supply does not exceed the reasonable, long-run demand for service.
But there is another aspect of the matter. Technical improve ments involving much fixed investment of capital are also more economical. A double-track railway has more than twice the efficiency of a single track railway. Electrical generators of large capacity cost less per kilowatt than do generators of small capacity. The cost of operating large plants thus tends to be less than for small plants. Public utilities are therefore anxious to increase the volume of business. Economical operation is also secured by "interconnection" of power sources into so-called super-power systems. A super-power system consists of two elements : the utilization of highly economical generating stations, steam or hydro, and the interconnection of power stations by transmission lines. Not only is the fuel consumption per unit of output reduced by using only large steam plants but the investment cost per unit of capacity is also lowered. By interconnecting such power sys tems the reciprocal sale of power from one system to another is made possible and a common reserve is made to serve for a large area. Co-operative action thus ensures the utilization of surplus
power, safeguards the service from interruptions and secures the advantages of long hour use of investment by building up the diversity of use. This movement for interconnection is growing particularly in the instance of gas and electric utilities.
The first class comprises the utilities which must adjust them selves to demand variations by having constantly ready a productive capacity equal to or exceeding the maximum demand for service. Thus utility plants will have spare capacity for service at other times in the shape of idle equipment and reserves of employees. This class of utilities has been called the "service type" and is exemplified by electric utilities, telephone and tele graph utilities, the different kinds of transportation utilities and the postal service. Here the nature of the service is such as not to permit of delay if it is to be performed efficiently. Technical development has not been successful in making available for instant use surplus service which existing equipment might have produced at times of low demand. Changes in the volume of business can not be met by a policy of meeting peak requirements in part by stored supplies of the past. This has a tendency, there fore, to increase the cost of operation.
The second class consists of those utilities where the inequalities in customers' requirements may be met, at least in part, by a policy of production and storage of surplus to meet future deficien cies. This class has been called the "product type." It is exempli fied by water and gas utilities which may produce at a uniform rate, impounding the water and storing the gas not required to meet the immediate demands against the excess demands of the future. Storage facilities thus enable the "product type" to oper ate at a uniform output within the productive limits for which the plant was designed. Utilities of the second class need have a producing capacity equated only to meet an average demand but they must provide storage capacity.
We must, therefore, compare the operating efficiency of the product-type utility, based upon a constant output with costs enhanced by an added investment in storage facilities, with the operating efficiency of the service-type with its lessened efficiency resulting from a variable output and with costs enhanced by "standby" losses and the carrying charges for idle equipment. The services of public utilities are thus conditioned by factors which tend to differentiate them from other business enterprises. They minister to wants which are regarded as basic. From a social point of view they are necessary economic functions because they are the basis for the specialization of occupations and the inter dependence which exist in modern economic society.