Legislative regulation by means of the charter or special fran chise was the next to be tried. The special franchise is now gen erally conferred under constitutional or statutory authority by local governments. The method of special franchise regulation is applied to so-called local public utilities, furnishing telephone, gas, electric, water and transportation services in local com munities.
The weakness of legislative regulation by charter was that the maximum rates therein provided were largely in excess of those actually charged by the companies. Competition of carriers with each other, the decreasing unit cost of operation on account of increased utilization of plant capacity, the decline in the level of prices after the Civil War, continuous improvements in technique, made necessary and possible the rendition of service at rates below those fixed in the charters. The failure to provide adequately for financial and accounting control enabled the issuance of more stock and the padding of investment accounts, thus vitiating the control based upon net income. Special franchise regulation fol lowed the procedure applied in the case of carriers. Maximum rates were fixed in the local franchise of telephone, gas, electric and water undertakings. These maximum rates soon became obsolete because the growing business of the companies required more complex and flexible rate schedules. Moreover, the com panies began to appreciate that increased earnings, both gross and net, could be secured by means of rate reductions.
When State legislatures in the case of national carriers and local councils in the case of local utilities attempted to adjust these rates downward, they were met by the objection that the change would violate a contractual obligation and confiscate the property of the companies. Only when the franchise was silent on rate questions or when the power to alter, amend or repeal the terms of franchises was reserved, could the power to regulate rates or service be exercised by State or local legislatures. Another evil that had crept into the administration of public utilities due to the ineffectiveness of rate control was discrimination in rates. This was also induced by the fact that competition had never been entirely eliminated. Added to this, in the case of the limited term franchises of local utilities, was the growing insecurity of tenure. Failing to obtain a renewal the properties would be worth only their scrap value. Often there were no provisions for public pur chase or for purchase by some other grantee at the end of the franchise period. The inducement was too great, therefore, to
manipulate operations so as to enable investors to recoup their capital out of earnings.
Thus the fundamental drawbacks of charter and special f ran chise regulation were : that such regulation proved inadequate when communities grew rapidly; or when, as during the period of the World War, underlying economic conditions changed rapidly, so that the administrative machinery for the execution of fran chise terms proved inadequate.
About 187o-8o a policy was adopted of fixing rates by direct legislation. Legislatures realized that statutory regulation should be general rather than specific; that the rate and service problems require continuous attention ; that the subject matter of statutes should be the laying down of principles and standards; that the new policy of continuous regulation required an effective agency, sufficiently "informed by experience" to carry legislative stand ards and principles into effect. This agency is the modern admin istrative commission, acting as an agent of the legislature. All States except Delaware now have regulatory commissions with varying jurisdictions. The Interstate Commerce Commission (1887), the Maritime Commission (1938), the Federal Power Commission (1920) and the Securities and Exchange Commis sion (1935), are Federal commissions regulating the interstate operations of national utilities. The administrative commission applies the common law rule of reasonableness to the concrete facts in each case and names the particular rate or service regula tion reasonable under the circumstances. Practically all States pro hibit discrimination in rates for service. This legislative in junction has been made operative in connection with another one calling for publicity of rates and providing that only those rates and regulations which are on file and have been approved by the administrative authority are the lawful rates. In some States designated local utilities continue to be controlled by means of franchises. One form of these local franchises, the so-called service-at-cost franchise, deserves special mention. In general, service-at-cost franchises seek to protect invested capital by giv ing the company an exclusive right to conduct the particular utility, the right being terminable upon purchase of the property at a stipulated price. See also UNITED STATES.