It's almost hard in 1988 to imagine postwar Chicago. A spirit of optimism pervaded the city. After all, Chicagoans were among the troops who defeated Hitler and saved the free world. That optimism even extended to the baseball diamond. Cubs fans knew their team could rebound from a disappointing third-place finish in 1946 to recapture the National League pennant that was theirs only two years earlier.
The city in some ways was primitive by 1980s standards. Modern conveniences we take for granted as necessities were new and exciting luxuries--televisions, FM radios, phonographs, air conditioners. The atomic bomb that exploded in 1945 showed the tremendous power of atomic energy, but no one was certain how that energy could be harnessed.
Chicago's new vim extended to the political arena. Voters threw out a bunch of rascals in the 1947 elections; 17 Republicans and one independent Democrat were placed in the City Council.
One of those Republicans was John Hoellen of Ravenswood's 47th Ward. He started his career with a bang--literally. On the day he filed nominating petitions, a small-time hoodlum tried to shoot him. Hoellen was saved only because the shotgun shells were wet.
The independent was Robert Merriam, of Hyde Park's 5th Ward, son of former alderman and mayoral candidate Charles Merriam. How upstanding was he? Alderman Paddy Bauler once told him there were only two honest aldermen in the city. One was Merriam. The other was Bauler himself, who unlike the "fakers" in the City Council claimed the integrity to admit to being a crook.
Even the mayor's office attained a new patina of respectability. Out went scandal-marred Ed Kelly. In came Martin Kennelly, a bland but blue-ribbon moving company executive with no previous political experience, the kind of candidate usually put up by Republicans acknowledging a losing cause rather than Democrats reasonably assured of victory. "We have a crackerjack mayor now," an optimistic Merriam wrote to a friend in early 1947.
The real power in the city, however, lay with the City Council's old guard aldermen. One of them was Clarence Wagner of the southwest-side 14th Ward. If anything, he is remembered today as the alderman whose death in a 1953 car accident opened the doors for Richard Daley to assume the Cook County Democratic Party chairmanship, and eventually the mayoral throne. But Wagner was a major power in those days; he was chairman of the council's influential Utilities Committee.
"Wagner was a very bright guy," Hoellen recalls, but apparently he had trouble with the concept of someone doing an honest job for reasons other than profit. "He got me on the side after I got an emergency crime bill passed. He thought I was trying to do some 'fetching' [grandstanding to attract bribes]. They had a rule requiring every ordinance to go through the Finance Committee. They held back 10 percent on every contract, and the 'ins' got that 10 percent." Sometimes the graft was even more blatant. "One company called the council to find out how much aldermen went for. They had heard $25,000, but Harry Sain was holding out for $27,000."
This motley crew had no shortages of issues facing them. There was the newly created Chicago Transit Authority to get organized, the Congress Expressway to construct, myriad local ward issues--and negotiations with the Commonwealth Edison Company over the city's electricity franchise, which was set to expire on September 17, 1947.
Just as Chicago in the late 1980s is trying to cope with the issue of how to distribute electricity as efficiently and cheaply as possible, so was the city in the late 1940s. There are parallels. Then as now, Chicagoans complained of the highest electric bills in the midwest and some of the highest bills in the country. Then as now, the city was in a state of political turmoil, with independent-minded aldermen battling machine stalwarts.
There is, however, a major difference. While 1988 Chicagoans are studying alternatives two years before the December 31, 1990, expiration date of the Edison franchise, aldermen in the 1940s barely considered the problem before it fell upon them. "The electricity franchise issue came up as soon as the new council convened, only six months before the expiration date of the old franchise," Merriam recalls.
Even the most senior of aldermen never had had to cope with this particular problem. Technically, neither had Commonwealth Edison. The city issued a nonexclusive franchise on June 28, 1897, to Commonwealth Electric Company, one of several in the city at that time. The deal was done over the objections of the young mayor, Carter Harrison II, who claimed that the powers granted the company would be too broad, the charges to private consumers too high, fees to the city too small, and the franchise's 50-year term too long. Harrison vetoed the franchise, but the City Council overrode him 46-19.
Commonwealth Electric's franchise was similar to one granted the Western Edison Company, which later became the Chicago Edison Company. The two merged in 1907, becoming Commonwealth Edison, and absorbed Chicago's smaller electric companies six years later.
Despite the debacle of the Samuel Insull years, when stock prices plummeted after the 1929 market crash, few complained about mismanagement of Edison at the time of the 1947 expiration of the franchise. "By and large, the Chicago system seemed to be managed fairly well," Merriam says. "The question was whether or not rates were too high."
L.P. Cookingham, city manager of Kansas City, recommended that Chicago hire a firm of engineers experienced in rate and franchise matters and be guided by their findings. Cleveland, Cincinnati, and New York had made such studies, he pointed out. "In each case consulting engineers were employed to gather the information and make recommendations on the franchise provisions. . . . Such a study may cost a lot of money but it may save the rate payers of your city millions upon millions of dollars in the next 25 to 50 years. Therefore any sum you can spend on the survey would be well spent and should react to the benefit of the rate payers."
Who was the best person to head such a study? Alex Elson, acting chairman of the Independent Voters of Illinois, recommended Harry Booth, an attorney with the Federal Power Commission and special utilities counsel to the Office of Price Administration and an attorney with decades of experience in utility rate cases. Others proposed for the consulting job included John Bauer, director of the American Public Utilities Bureau, and George Goldthwaite, an engineer with wide experience in utility matters.
A Utilities Committee subcommittee, meeting in closed session, chose a study director on August 1, 1947. He was none of the above. Instead they tapped John Reid Turney, a Washington, D.C., attorney and friend of Kennelly. Turney's expertise lay in transportation, not power, and he had a reputation of favoring private over public interests. Turney began his investigations on August 13, only 35 days before the Commonwealth Edison franchise expiration date.
Merriam immediately expressed concern over the choice of Turney. What about his qualifications and background? Wouldn't it have been better to get someone who knew the local picture, the company's history, and the laws of Illinois? Why were men like Booth and William Ming, a well-respected University of Chicago law professor, passed over? "I don't mind telling you that I was opposed to this selection, because I felt Mr. Turney did not have sufficient expertise in the field of electric public utilities," Merriam wrote Bauer afterward.
One option never seriously considered was public ownership. Newspapers for the most part gave the issue skeletal coverage. The Tribune wrote the lengthiest story but placed it in the financial pages, whose readers would be those least likely to support such a concept.
Advocates of municipal utility ownership had barrels of statistics on their side. John Bauer pointed out that private companies in other large American cities cost nearly twice as much to operate as municipally owned ones. Even Turney in his report would predict that a public system could save Chicago consumers $5 million per year.
But public ownership backers were generally dismissed by the powers that be as impractical Gyro Gearlooses with more than a slight socialist tint. The rhetoric of a Public Ownership League pamphlet was a case in point: "Whoever controls electric power will be our masters. Opposed to municipal ownership of the electric light and power utilities are the privately owned companies, the higher up power monopolists, the power politicians, most of the great banks and trust companies, and many of the newspapers."
Some remained skeptics of municipal ownership for a reason pointed out by Laurin Henry, a University of Chicago graduate student who would soon serve as a researcher for a citizens committee investigating the franchise. "Municipal ownership works best in cities that have a long history of healthy politics; where the people are politically 'alive' and give the utility both their cooperation and their criticism. It might be questioned whether the people of Chicago are sophisticated enough, politically speaking, to make municipal ownership desirable."
"There was not any real thought of municipal ownership," Merriam admitted later. At the same time, he valued the threat of a municipal takeover as a weapon for extracting concessions from the electric company, and Merriam wanted that option kept open.
Chicago's franchise with Commonwealth Edison expired September 17, at which time the City Council granted an extension until a new agreement could be worked out. The Utilities Committee held public hearings a month later, from October 20 to October 24. Commonwealth Edison representatives came armed with information. Francis X. Busch, the Edison attorney, presented a 46-page statement, which said, in effect, that all regulation of the utility lay with the Illinois Commerce Commission and the city could determine nothing beyond the length of the franchise. Busch argued for a 43-year term.
Edison representatives explained away the lower electricity rates in other cities: Cincinnati had lower wages and taxes; Washington, D.C., had lower taxes; Los Angeles had low-cost power from Boulder Dam, and low taxes due to municipal ownership; Buffalo had cheap hydroelectric power; Milwaukee had lower wages; Detroit had lower taxes; and so on.
Merriam wondered why the hearings couldn't have been put off until the Turney study was released, so it could be available to the Utilities Committee and potential witnesses. As it was, the aldermen were "cold," and advocates of public ownership lacked information they needed to organize their case.
Three days after the hearings ended, the Utilities Committee met and quickly approved a basic franchise policy that the minority was not given a chance to debate. With no discussion, let alone investigation of a possible municipal takeover of electric service, the committee authorized Turney, now empowered as an assistant corporation counsel, to open negotiations with Commonwealth Edison. "By making this move the city virtually threw away its biggest trump card--the threat of public ownership," Merriam commented at the time.
The haste with which aldermen urged Turney to begin dealing seemed doubly peculiar once his report was in hand. Turney conceded, "The applicant, Commonwealth Edison, is a well-organized, ably directed and soundly financed utility. . . . Its structure is one conducive to the attraction of capital upon reasonable terms. Its capital securities are of the finest market quality."
But he peppered the report with criticisms of the company. Its depreciation reserve (33 percent of plant investment) was nearly 50 percent beyond the average of utilities in the other 23 largest American cities. Commonwealth Edison was found to spend twice as much on advertising as those utilities.
Worst of all, "The charges for the Edison Company for the basic services [residential and commercial] are relatively higher than those in other American cities, and except to the extent that such charges are required by operating costs and conditions beyond the control of efficient and alert management, are justly suspect of being unreasonable. . . . The existence of the higher charges for these basic services has resulted in an inadequate utilization of electricity for residential and industrial purposes in Chicago as compared with other large American cities."
Turney reported that by his calculations, Commonwealth Edison's revenues in 1946 from small [residential and commercial] consumers exceeded a legitimate rate of return by nearly $11 million (or 22 percent). Revenues from industrial users were excessive by 10 percent, and the utility actually lost money providing rail service.
"The greater part of excess earnings were extracted from the customers of the basic services, that is, residential and commercial customers," the Turney report continued. "The larger customers, industrial and utility, not only were in a position to negotiate and, if necessary, litigate in order to secure reasonable rates, but, because of their particular situation, in many cases were able to generate their own power should the company's rates become excessive."
Said the report: "During the past 10 years and in 1946, the company charged rates which produced revenues substantially in excess of the minimum revenue required to produce the excellent service which it has produced and to which it is fairly and reasonably entitled."
But Turney added, "In view of the rapid increase in the price of labor and materials, it is possible if not probable that the Edison Company will require an increase in rates within the next year."
Merriam could not believe that someone ostensibly interested in gaining the best deal for Chicago consumers would include this last sentence. "Wow! Why encourage this?" he red-penciled in his copy of the Turney study.
If Merriam had criticisms, he was not alone. Onlookers from all sides attacked the proposed franchise that came as part of the report. Most of it consisted of noncontroversial provisions, the nuts and bolts of any franchise--"licensee shall be directed, managed and operated honestly, prudently, efficiently and economically," and so on. But various sections contained controversial conditions.
Section 7, for example, permitted the city to examine books and accounts at a reasonable time and upon reasonable notice. Section 10 dealt with the company's compensation to the city (the city was then taxing the company 3 percent and it sought a 5 percent levy). Section 11 allowed for the establishment of an adjustment board, paid by the company and composed of one representative from the city, one from the company, and one agreed upon by the other two (or, failing that, one chosen by the senior judge of the Seventh District Court of Appeals). The board "shall investigate and determine if change in laws, economic conditions, or in art or methods warrant change in the franchise." If so, the board may recommend a matter of correction, which "may" (not "shall") be enacted into an ordinance. Section 12 called for the means by which the city might acquire the franchise.
But the key to the franchise agreement lay with Section 8, which ordered the licensee to "exercise its best endeavors to maintain its charges at a level which will produce revenues substantially equal to the costs of the Provision of Electric Energy by it, plus a Reasonable Return upon the Value of the Utility Property by promptly initiating and filing schedules increasing or decreasing its charges to said level whenever the results of its operations for any immediate preceding calendar year indicate that the then level is substantially below or above the level first defined." It was, in other words, an attempt by the city to prevent the company from reaping excess profits.
A rather pathetic attempt, Laurin Henry would conclude. "This seems too weak to produce anything but endless negotiations and probably litigation," the young researcher wrote of Section 8. "The definition of 'Reasonable Return' is left completely to the company's discretion." Henry saw no way the company could be forced to cut its rates. "The only threat is a vague one to terminate the entire agreement, which the city, of course, would be reluctant to do; even then, the company might contest on the grounds that there was not sufficient ground for termination."
Henry also complained about the concept of a city tax on electricity, noting the U.S. Supreme Court had ruled that utilities could pass such a tax on to their customers. "If one feels electricity is a mere commodity, a tax is fair," he commented, "but if one feels, as I do, that electricity is desirable for society then it becomes unwise to levy a tax of this kind. This is not only a tax but a regressive one, in that it falls increasingly heavier on the small users and lower income groups. These, of course, are exactly the groups on which wider use of electricity needs to be encouraged."
In summary, "There are too many unsettled points in regard to rate control, which is, after all, the heart of the franchise." Henry argued that the company would rather buy a document committing it to litigation than one that was specific but tough. He noted that historically, utilities manage to take care of themselves during prolonged controversies. "After all, the consumers pay the legal fees."
If Laurin Henry was not buying the proposed franchise, neither was Commonwealth Edison. The electric company broke off negotiations on December 15, six weeks after the talks began.
Francis X. Busch wrote Wagner a 31-page letter of complaints. The four main ones: that "the company had no excess earnings in 1946," because of what he called "an unjustifiably low rate base"; that industries and not small customers were the ones paying too much, inasmuch as industrial rates should be kept low "in the interest of commercial and industrial development in the city"; that John Turney's comparison of Chicago and other cities used dissimilar figures; and that Turney's figures for taxes were incorrect.
Busch again insisted that the determination of rates is "the exclusive right of the Illinois Commerce Commission." While grousing about compensation to the city, he admitted that the company "is willing to consider a reasonable increase" from the 3 percent levy then in effect. He objected to a provision of Section 14 whereby the entire franchise could be nullified if any provision were found invalid by a court. Fearing "fishing expeditions," he objected to a section allowing the city at any time to look at books and accounts. He continued to campaign for a 43-year franchise, claiming that the company needed it to sell long-term bonds. ("Its splendid credit has been built up by its performance under such long term franchise. Of its present maturing bonds, $100,000 mature in 1985. The company's necessary financing will, in all probability, involve the issuance of additional mortgage bonds.")
Alderman Clarence Wagner responded with a report to the City Council dated January 5, 1948. He claimed that "rates against users of utility services in Chicago have been unreasonably high and that the present charges of the company, especially those to residential and small commercial users are excessive. . . . Despite these excessive earnings, in recent years the Company has made no efforts to reduce its rates voluntarily, and under the state law, it was under no specific obligation to do so." Wagner complained about the "legal smokescreen designed to conceal [the company's] real objective which is automatic rate adjustment. . . . The argument that the ratemaking clause would adversely affect the credit of the company and its ability to finance its capital operation is completely fallacious. Investors in Edison securities are not gullible to the degree indicated in the argument. They know that under the law the Edison Company can be restricted to a reasonable return in its investment. . . .
"This is as far as we can go," Wagner declared. He suggested that the city make a "take it or leave it" offer of the terms Chicago favored. He even hinted at the heretofore ignored topic of municipal ownership.
Edison's recalcitrance drew fire from the press. A Tribune editorial noted: "The city is asking [Commonwealth Edison], in effect, to share its profits with the consumers of electricity. The company balks at the proposal." The Tribune pointed out that a similar "profit sharing" proposal had succeeded in Washington. The Sun noted that according to the Turney report, the utility had consistently earned a return of 8 percent, nearly twice as much as the 4.6 percent Turney estimated to be a fair return based on the cost of attracting capital. It claimed that the city was asking two "fair and reasonable concessions": that Edison share excess profits with consumers in the form of lower rates, and that the city obtain some degree of home rule over the utility.
Both papers wondered out loud why Commonwealth Edison was so insistent that only the ICC (which Merriam called "a weak sister") could regulate it. The Sun mentioned the company's "remarkable preference for state 'regulation' which is both a commentary on the state's relations with utilities and a token of the need for stronger local control." The Tribune commented that "when a utility announces that it prefers to be regulated by the state, there is good ground to suppose that state regulation is not very effective. Plenty of other evidence can be found to support that belief."
However, the Tribune also acknowledged that the average citizen paid 1 percent of his income in electricity, one-third the 1908 percentage. It cited "improvements [that] would have been largely fruitless . . . had not the power companies had a record of stable earnings that permitted them to sell the stocks and bonds with which to replace inefficient equipment and expand their services." Nevertheless, "We hope the aldermen recognize the strength of their position and decline to accept dictation from the company."
Bill Carr of the leftish Chicago Star put the matter more bluntly: "Francis X. Busch, Edison attorney, told Wagner and Turney that the company was not willing, as a matter of policy, to guarantee that it would not seek 'more' than a reasonable return.
"In other words, Commonwealth Edison made it clear that it intends to continue wringing unprecedented profits from the pocketbooks of Chicago through the highest light bills the traffic will bear."
If other papers stopped far short of such an attack, their reason may have been a practical one: Commonwealth Edison all of a sudden became a very heavy advertiser in Chicago dailies in 1947 and 1948.
Some ads were cooking hints. If Chicagoans on May 4, 1948, had the yen to bake a yummy batch of jelly-filled bismarcks, they needed look no further than the full-page ad in the newly formed Sun-Times. Other ads flaunted the "territorial development" of forward-thinking Chicago and Commonwealth Edison--yet were published in the least likely spot to attract settlers, Chicago newspapers.
Irving Flamm, attorney for the Progressive Citizens of America, wrote Wagner: "During recent months Edison appears to have spent abnormally large amounts for full and half-page advertisements in Chicago newspapers. Last week, for example, a full-page ad was given over to a recipe for good chicken gravy. It is considerate of Edison to offer its cooking advice. But the relationship between chicken gravy and the manufacture and distribution of power is too remote to warrant such expense being passed on to rate-payers. . . . Edison also paid for many full pages to induce manufacturers from other parts of the country to move here because of our industrial advantages. Chambers of Commerce sometimes resort to such advertising. But when they do, it appears in magazines of national circulation. The element of chance that an Alabama industrialist will move his plant to Chicago because he happened, while visiting here, to see Edison's advertisement, is so remote that no sane businessman would squander thousands of dollars for such local advertising to attract foreign industry. Can it be that the unusual frequency and the abnormal size of Edison's local advertising expenditures during the last year is in the nature of a goodwill offering to Chicago's press? The new franchise should not present the cost of such publicity to be passed on to the Chicago consumer through higher rates."
"The ironic twist to the whole affair is that Commonwealth Edison is making the people of Chicago foot the bill for the whole campaign against public ownership which would mean light bills a third to a half lower than those now charged," wrote Stan Macek in the Star. "M.L. Aylesworth, chief lobbyist for the Power Trust, said 'Don't be afraid of the [advertising] expense. The public pays the expense.'"
Another type of advertisement dealt with electric appliances. Commonwealth Edison sold them, at retail cost. Some skeptics accused the electric company of trying to run retailers out of business, although there was no evidence to support that theory. Instead, the utility merely sought to get these still-novel gadgets into the hands of consumers so that they would use more electricity. Back in October, when 31st Ward Alderman Thomas Keane had asked at the Utilities Committee hearings, "Is it necessary for you to engage in retail business in a city with so many proven retailers?" an Edison spokesman had responded that the company sales actually helped existing retailers, because Commonwealth Edison had a program to help dealers with sales and promotions.
Busch had explained that the promotion and sale of new appliances was an effective means of increasing electricity consumption, and that Edison wanted to give retailers a boost by publicizing the latest "scientific discoveries" (such as electric blankets).
When asked if advertising costs were excessive, Busch had replied, "So many people want Buick cars, we wonder why they have to go advertise in all the magazines to sell Buicks, but that is looked upon as good business, to build up their sales." (He neglected to mention that although Buick was in competition with Oldsmobile, Chrysler, and Ford, Commonwealth Edison customers did not have the option of Joe's Discount Electricity.)
Busch had listed the company's main responsibilities: to provide the best equipment and services at the lowest cost possible because "dependable rate service at the lowest possible rates for large users encourages commercial and industrial development"; to provide fair wages and decent working conditions; and to "treat investors fairly and attract new ones at the best conditions."
The talks that broke off on December 15 abruptly resumed March 1. Two days later the electric company agreed to a Wagner proposal, which the chairman said "gives the little man--the individual user of electricity--about as good a break as he possibly could get," and the revised ordinance was submitted to the Utilities Committee. Wagner announced that Busch had agreed to a 43-year franchise proposal that included: an increase in the company's tax to the city from 3 to 4 percent; an automatic rate adjustment clause limiting rates to the amount necessary to yield a reasonable return on investment; a provision allowing the city to terminate the franchise; an adjustment board, composed of one person chosen by the city, one by the company, and one by the other two (or the Court of Appeals).
"Without prior notice to the Committee, Wagner prepares a press release and reports a settlement to the Council," Merriam observed at the time. Merriam asked himself two questions: What made negotiations resume, after Wagner had said "This is as far as we can go" in his January 5 report to the council? And why did the company do an about-face?
The Daily News theorized that the logjam was broken because the electric company needed the franchise to sell bonds. Merriam had a different theory.
"It looks like they were laying low all along in hopes of getting more."
It could be they got it. The Sun-Times noted a change in the wording of Section 8, and commented, "Perhaps this change has something to do with the remarkable turnabout of the Edison company, which after rejecting the ordinance for weeks, suddenly announced that it was ready to accept it." The original version had allowed Commonwealth Edison a "reasonable rate of return" on the value of its utility property, with "value" defined as the actual investment minus depreciation, plus working capital. The revised form allowed the company a reasonable return on its "undepreciated capital."
What is "undepreciated capital"? The newspaper said Professor William Ming noted that the phrase had no established meaning. "He can think of at least four things which the term might mean. It is a safe bet that the utility lawyers can think of a great many more meanings."
Irving Flamm of Progressive Citizens of America also expressed reservations in a letter to Alderman Benjamin Becker. "The section which goes to the rate structure is far too weak, too general and qualified," said Flamm. "There is the implication from this section that the city has extracted unusual concessions from the company which may later be upset by the Illinois Commerce Commission. This attitude is unwarranted. There should be no suggesting in this ordinance that rates should be left to the Commerce Commission. Whatever powers the ICC has will continue whether alluded to in this ordinance or not.
"Since Section 8 is the heart of the franchise, it should be strengthened and clarified so that there will be no doubt about its meaning, no confusion on what Edison is not accepting and what the people are to get in return."
Flamm commented that it was important that "operating costs" be limited to those necessarily incurred in production, transmission, and distribution of energy, and not include such expenditures as "excessive salaries, stock promotions, expenditures to support lobbies to influence legislation or the press. . . . Edison's expenses, unlike private enterprises, do not come out of the pockets of Commonwealth Edison officials or stockholders. Therefore it is necessary to the city and adjustment board to retain control over 'operating costs.' Unless this is done, the new franchise will become involved in countless litigation, with the people paying both sides. Commonwealth Edison, with nothing to lose, could continue litigation it would otherwise avoid if cost were shifted to stockholders in the form of smaller dividends."
He claimed a 4 percent profit ceiling was a "reasonable return" because "a corporation granted special monopoly privileges in a safe field like light and power should not be allowed more than that. . . . The proposed franchise is no new or hazardous venture. The company has no new need of capital, and when it does it can raise it on the strength of a franchise which permits a 4 percent overall yield."
Flamm complained to Wagner about the electricity tax. "It makes no difference whether Edison pays the city 5 percent or 3 percent. Whatever the rate is, it will all cost Edison's shareholders nothing. Edison will simply act as a collecting agent for the city, passing the tax back to the people in the form of higher light bills. This is a sham issue, and the people should be informed on this point."
Charles W. Smith, chief of the Bureau of Accounts of the Federal Power Administration, commented, "My overall conclusion is that the [draft of the ordinance] is hopelessly weak as to the rate-making provisions and it is not strong in respect to the capture by the city. . . . The language is so loosely drawn as to have little force in my opinion. . . . Section 8 provides that the licensee shall endeavor to maintain revenues at a level equal to the cost of service, but decreases in rates under that section will be made only when rates under that section are substantially above the cost of service as defined by the ordinance. What is substantially?"
One of the common complaints dealt with the length of the franchise; the word "interminable" popped up frequently. John Hoellen as early as March 10 offered an amendment that would have cut back the life of the franchise from 43 years to 18. James Bonbright, former director of the New York Power Authority, and John Bauer of the American Public Utilities Bureau called the duration "fully unjustified in view of present-day technological developments."
Opponents argued that because of the unclear role atomic energy might one day play, the city should not bind itself to a long franchise with a power system that could become obsolete. Was atomic energy for domestic use imminent? The Tribune cited Dr. Frank Spedding of the Atomic Energy Institute at Iowa State University, who predicted atomic energy plants being constructed within 20 years.
Commonwealth Edison officials claimed the 43 years were necessary to attract investment from eastern banks that demanded a franchise extending beyond the maturation date of the bonds it issued. Yet researcher Laurin Henry noted, "Commonwealth Edison issued and sold $280 million in first mortgage bonds at 3 percent in 1944 and 1945 when it was operating under a franchise which expired in 1947."
Merriam and Becker called for public hearings on the proposed franchise. "We already had public hearings," Wagner argued, but his two City Council colleagues replied that those had taken place before there was any new franchise for the Utilities Committee to consider.
Wagner agreed, but his decision may not have been heartfelt. Although Merriam asked him to call in several outside experts--Bauer, Bonbright, Fredrick Kleinman of the ICC--Wagner thought about it for three days, then phoned to say John Turney was the one expert who counted and he would not call anyone else.
This reticence led to the formation of a Citizens Franchise Committee headed by 87-year-old Carter Harrison II (the same man who'd vetoed the last franchise 51 years earlier) and 73-year-old Charles Merriam (Robert's father, a reform-minded former alderman who, ironically, ran against Harrison for mayor in 1911). Harrison and Merriam in a letter to the Daily News claimed the ordinance had "fatal weaknesses" and noted that they'd invited Bonbright and Bauer to testify at the franchise committee's expense.
The April 1948 hearings carried an entirely different tone from those of the previous October. Then, most of the testimony consisted of nuts-and-bolts statements about the utility's operations. Now criticism reared its head. Bonbright argued, "It is my distinct opinion . . . that in its present draft the proposed ordinance is critically deficient and would fail to obtain the very objectives of Mr. Turney's [proposal]. There are some points in the franchise that are so utterly in need of restatement and of revision that . . . revisions [are] not merely desirable, but utterly essential."
Bauer testified: "If the proposed franchise is developed Chicago will muff a crucial opportunity to get effective regulation in the public interest over the number one public utility. . . . It does not establish precise rights of the investors in the company and of the consumers and the public at large."
Others expressed more specific objections in testimony or letters to the Utilities Committee. Charles Barnett, attorney for the Small Electricity Users Rate Association, observed: "In his explanatory remarks of March 3, 1948, Mr. Wagner makes no mention and ignores entirely the existing rate discrimination by Commonwealth Edison against small electricity users, notwithstanding that in his report of January 5, 1948 he contended 'The relative discrimination against residential and commercial users should be eliminated.'"
Paul G. Annes, president of the City Club of Chicago, called the proposed franchise "seriously inadequate, in both substance and form, on many points." He complained about "such objectionable features as term of franchise, the determination of the cost basis upon which a rate of return is to be computed, of changes in rates, and of the recapture price should the city of Chicago wish to purchase the property.
"The proposal to grant a franchise . . . for . . . 43 years is of itself sufficient ground for rejection," Annes noted. "The history of the company's financing operations in the last few years, however, demonstrates that long-term financing is unnecessary. . . . Twenty years should be a maximum.
"So far as possible the ordinance should be drawn as to avoid litigation. Further, some provision should be made so that in the event of litigation the burden thereof is borne by the stockholders of the company rather than the consumers of electricity."
Annes also criticized the proposed adjustment board. "Its membership should not necessarily be limited to engineers," he stated, nor should it be funded solely by the company, "for the reason that there may be a tendency for the members of the Board in such circumstances to favor the party by whom they are compensated."
Irving Flamm, kept from the hearings by illness, wrote a letter to Wagner calling for the Utilities Committee to determine the value of the Edison properties now, while no franchise was in effect, so that a fair rate base could be determined. "If the rate base is fixed, the rate formula and depreciation rate agreed upon, and additions added at cost, the Adjustment Board's task will be relatively simple."
Flamm also urged that the costs Edison could pass on to consumers be only those necessary for transmitting, generating, and distributing power. Flamm proposed that the word "necessary" precede "operating costs" everywhere in the franchise. He identified as unnecessary costs the Edison advertising campaign, a $5,000 check from Edison to the Cancer Fund ("such contributions, if any, should be made by the shareholders, not the ratepayers"), and the salaries of employees who did not deal in production (such as "Edison's high-priced tax and financial experts, who contribute nothing toward the production and distribution of light and power. Whatever their value to the stockholders, they have none to the ratepayers. Shareholders, if compelled to absorb such expenditures, would be quick to protest or remove them").
Laurin Henry criticized a section added by the electric company during the March negotiations, that would protect the franchise from amendment for the first 25 years. "The stability of the franchise was cited as an excuse, but experts pointed out the likelihood of material changes in economic, financial, and social conditions and urge that amendments be possible when necessary," he commented.
Thus armed with testimony, the aldermen retreated to committee. The minority bloc proposed amendments--42 of them, to be exact. Merriam proposed one under which the company would "refrain from diverting any of its funds to the ownership or operation of any business activity other than the Provision of Electric Energy, unless approval is obtained by competent authority." That amendment was defeated, 12-3. So were others calling for rapid conversion from overhead to underground wiring; for replacement of the city's remaining direct current lines with alternating current lines within a set time limit; for an equalization reserve that would return excess profits to consumers in the form of rate rebates; and for the mandatory preservation of records by the company.
Of the 25 amendments that passed, only one was of major importance. It stated: "The Company will engage in no unfair employment practices on account of race, color, religion, or national origin." This was revolutionary for its time, an equal opportunity clause neither federally mandated nor on the books in other large cities. Archibald Carey, Third Ward alderman, pushed for the measure. "Wherever he went, the imprint of civil rights went," Hoellen remembers. Merriam adds, "It was one of the few areas of this franchise where we [the council minority] prevailed."
Merriam later conceded that most considered the second hearings to be a joke. "I remember the way they made fun of everything," he said. "Paddy Bauler was the most obvious example of uninterest; he could care less. Anthony Pistilli of the 20th Ward would come up to me after each debate and laugh 'Good argument, Bob, about five minutes more and you'd have my vote.' I brought in David Lilienthal, former chairman of the Atomic Energy Commission, one of the recognized experts in the use of atomic energy. Commonwealth Edison people took the position that this was a ridiculous argument to get into, because nobody knows if atomic energy can be used."
Buoyed by a lopsided Utilities Committee vote, Wagner took the franchise to the full council. He delivered a message of self-congratulation. Wagner reported that he'd received bids to do franchise studies that would have taken 12 to 18 months and cost from $200,000 to $450,000. But he was able to obtain one (Turney's) that took only 60 days and cost only $25,000. And to break the impasse, Wagner boasted, "the company acceded to practically every demand from the city. It was the unanimous agreement of the city's representatives that the ordinance, as agreed to, not only fully protected the rights of the city and the consumers, but also fully complied with the principles of basic policy which had been laid down by the Committee."
City representatives, of course, were not in unanimous agreement. Four aldermen--Merriam, Hoellen, Allan Freeman, and Alban Weber--wrote a minority report blasting many of the provisions of the franchise. The minority report cited the objections of Bonbright, Bauer, and the City Club, and called for amendments in five areas:
Length of franchise. The minority claimed the Utilities Committee recommended "what seems like a perpetual franchise." It noted, "Counsel for the Utilities Committee claims the long length is due to the company's need for security because some East banks require them to invest in bonds of utilities which have franchises extending beyond the length of the bonds. But the bulk of utility bonds are held by insurance companies and educational institutions, not eastern banks. And if Commonwealth Edison got stuck in a really tight bind, it could issue bonds that expired prior to the expiration of the franchise or request the city to amend the franchise to cover the situation."
Control of earnings. The minority complained that "Cost of Providing Energy" and "Reasonable Rate of Return" were not properly defined, and that the franchise contained no mechanism for giving the consumer the benefit of earnings in excess of a reasonable return. It called for an "equalization reserve." When that reserve reached 5 percent of the depreciated original cost of the company, the company would have to reduce rates to a point where the reserve would not exceed a maximum figure.
Rate structure for small users. The minority cited Turney's suspicion that small consumers were being charged unfairly and scoffed at the majority's reason for not doing something about it--namely, that there'd be too much paperwork involved in reclassifying businesses and industries.
Franchise adjustments. The minority aldermen proposed an adjustment board not necessarily composed of engineers, with the power to amend the franchise.
Municipal acquisition. "We are thoroughly convinced, and we can show, that the [Commonwealth Edison] properties could be purchased today for far less than the price to be paid under the majority's [proposal]," the minority aldermen claimed. They called for an adjustment court that would determine a fair price if the sale of properties became an issue.
"We submit that the revised draft is fundamentally defective," the four aldermen concluded. "The proposed ordinance is hopelessly weak and ineffective, and must be rejected."
Hoellen later gave a more succinct opinion. "The franchise smelled like the stockyards."
A City Council meeting to debate the franchise was set for May 24. Tempers flared the night before, as Wagner, Keane, Becker, and Merriam debated the franchise on a radio program. "Although the subject was supposed to be the franchise, we seemed more to test the strength of our voices," Merriam would remark later.
The next day he joked at the council meeting, "This debate got heated, and I thought I saw Alderman Wagner disappear for a minute, and when I came out after it was over I discovered my car had a flat tire."
When the council took up the franchise, Merriam immediately called for an amendment limiting the franchise to 20 years. He opened the debate with a long and winding speech that covered the minority's objections to the franchise as well as his personal frustration with majority bloc intransigence. "Our own negotiators got within grasp, within reach of a franchise which would in all respects have been a model franchise for the city of Chicago and fell short, fatally short, at the last moment," Merriam said. Complaining about the franchise's length, he commented, "Although I am the youngest member of [the council], I will be 73 years old when the franchise expires."
Wagner, who again pointed to the eastern banks, decided to chide the minority. "You know, I enjoy listening to the bleeding hearts for the consumer. But let's get down to the facts and find out how we can help the consumer. We owe it to the people of Chicago to give stability to those securities." When Alderman Nicholas Bohling, who was not a Utilities Committee member, asked to hear John Turney's opinion on the franchise length, Keane and Wagner blocked him. They moved, with Kennelly's consent, not to call in experts until all amendments had been considered. It was an astute call; debate over the amendments lasted more than 12 hours.
Commonwealth Edison had its defenders. Alderman Reginald duBois of the Ninth Ward declared, "This country owes all of its greatness to the opportunities that have been offered to private enterprise making possible all that we enjoy today and being a part of the greatest country in the world. In the Edison field 20 years jeopardizes a lot of things we have no right to jeopardize, gentlemen. And I am not getting paid for making this statement, gentlemen, if there is any misunderstanding about that."
Becker said of the duBois comments, "This is the best Fourth of July address I have heard on the Edison company. I could have almost shed tears when I heard Alderman duBois concerned about the Edison Company. Every one of us believes in the American system of enterprise. But on the other hand, where a monopoly has the exclusive right to operate a utility and to serve the people of Chicago is involved, I would shed some tears for the people of Chicago. Let us bear in mind that this Edison Company, like every utility, needs regulation. Alderman duBois, this Edison Company, for whom you shed so many tears, has been guilty of excessive rate charges."
Wagner pulled out a trump card--the idea (taken up by a Tribune editorial the day before) that those who opposed the franchise ultimately sought the socialistic goal of municipal ownership. It made no difference to him that Robert Merriam, Hoellen, Freeman, Weber, Charles Merriam, Harrison, and Becker all had expressed opposition to a municipal takeover of the electric company at the present time--something Wagner conceded.
"I am certainly not going to charge that this [opposition] is a scheme on the part of the minority to accomplish municipal ownership," Wagner stated, thereby suggesting it possibly was. He went on to insist that a 43-year franchise was necessary because "the Edison company has said they won't take less."
Merriam shouted back, "Edison won't take less than 43 years? Are we running the city, or are they? Are we men, or are we mice?"
Squeak, squeak. Merriam's amendment to shorten the length of the franchise was defeated 35 to 10. Even though debate on other amendments continued past midnight, the minority bloc's cause was lost.
The vote numbers remained similar on other amendments. A motion by Becker and others to establish clearer definitions for "Cost of Provision of Electric Energy" died 35 to 10. A motion to adjourn lost 30 to 15. The motion for a stronger adjustment board--killed, 39 to 7. The amendment to keep the electric company from diverting funds to anything other than the production of electricity--dead, 45 to 4. The motion to replace direct current wires as quickly as possible--defeated, 40 to 7. And so on.
The franchise eventually was passed 39 to 10. Without specific definition of such terms as "Reasonable Rate of Return." Without a determination of the value of Edison's property. Without a provision defining which operating costs were necessary for the transmission of power. Without a provision to expedite the change from direct to alternating current. Without an agreement to switch wiring from overhead to underground. Without a clause limiting Edison's business activity to the provision of electric energy. Without an equalization reserve. Without an agreement to resolve the disparity between residential and industrial rates.
Kennelly noted this last failing at the last moment. He asked Commonwealth Edison to undertake an immediate revision of its rate schedule to remedy "discrimination against residential and small users"--making the statement June 11 as he signed the franchise ordinance.
A few months later, John Bauer, making a comparative study of large-city franchise agreements, wrote Merriam asking for a copy of the Chicago electric franchise. Merriam sent Bauer a copy with a note, "Read it and weep."
To what extent has the franchise proved its worth? The two main sections, involving rate adjustments and the adjustment board, have never been employed, according to Commonwealth Edison authorities. The last DC wires were replaced in 1973, more than five years after the date proposed by the most generous minority bloc proposal. And Chicagoans still face the highest electric rates in the midwest, among the highest in the country.
What happened? Why, in the face of evidence from impartial authorities, was so apparently spineless a franchise allowed to pass?
"We in the minority bloc never believed we had any kind of chance at all unless we had the media involved," Hoellen confesses today. "If the media had taken a strong view, maybe Kennelly would have listened."
Merriam takes the political view. "Part of it was due to a struggle, of who was going to run the City Council," he claims.
Why did Kennelly, if he openly remarked about the unfairness of the bill to small users, sign it anyway?
"He was a weak leader. He didn't play any major role," says Merriam. "Besides, Charles Freeman, the company's president at the time, had excellent connections with him. Kennelly's sympathies as a businessman lay with Commonwealth Edison. His only major concern was that he didn't want any scandal with the franchise."
What about scandal? Was it true that the position papers presented to the aldermen in the Edison franchise negotiations had to be green ones?
Merriam doubts such shenanigans took place. "I have no evidence of vote buying. I didn't see evidence of booty passed around. Edison Company was concerned about its image. As a result of the Insull period, there were enough inhibitions in place. By this time, the company had a reputation as a robber baron. The postwar attitude was to try to create a performance record rather than to buy its way into profits."
Hoellen and Merriam both say no one ever attempted to buy their votes, although Hoellen supposes he was shunned because it was known that his vote was not for sale. As for the other aldermen, "There was always talk on graft. I assume there was some. . . . Joseph Rostenkowski made it into a joke. His office was located near the pressroom and people heard him shout 'I didn't get my $1,000! Who's cheating me?'"
A few days after the marathon council meeting, Merriam received a letter from a Boy Scouts administrator reading, "Congratulations upon your courageous stand with regard to renewal of the Edison franchise. Your fight was in the Merriam tradition."
The alderman replied, "Thanks for your kind remarks with reference to the Edison franchise. It was in the Merriam tradition in more ways than one--I lost."
Art accompanying story in printed newspaper (not available in this archive): illustration/Carl Kock; photos/Bruce Powell.