Eastern Rate Case of 1910 and People’s Lawyer

Hundred year old lesson for the Public Utilities Commission

Electricity Bill and Scientific Management:

by Professor Milton Rajaratne

article_imageWinslow Taylor

Frederick Winslow Taylor is known as the ‘father of scientific management’. Taylor and his management thoughts became popular not only in America (USA) but also in Europe and Japan because of a litigation popularly known as the ‘Eastern Rate Case’.

In 1910, Eastern Rail Road Company of America submitted an application to the Interstate Commerce Commission of America seeking permission for increasing freight rates of the vessels that it operated. The Interstate Commerce Commission of America is an institution similar to the Public Utilities Commission of Sri Lanka (PUCSL) that deals with appeals for rate hikes from governmental and nongovernmental utilities industry.

The proposed rate hike of Eastern Rail Road Company, as was thought by many at that time, would inevitably invite a chain of price increases in many industrial inputs as well as consumer goods which finally could adversely affect the general public. Louis D. Brandeis, an American Lawyer who was known as the “people’s lawyer”, appeared against the move of the rate increase and filed a case against Eastern Rail Road Company on behalf of the general public.

Brandeis argued that Eastern Rail Road Company was seeking rate hike as it had failed in management which is a sole responsibility of the company but not of the general public. He maintained that management failure has caused inefficiencies and as a result the cost of operations has increased and thus it was unfair to grant permission for the company to increase rates. He connected the rate issue to management failure and implied that the cost of management failure need not be borne by to the general public who are not held responsible for the management affairs of the company. Having the Jury asked him to propose a cure for the management ailment that he claimed that the Eastern Rail Road was suffering from Brandeis recommended ‘Scientific Management’ (the term he coined after the ‘Shop System’ of Taylor) as the new management system for the Eastern Rail Road to adopt through which the company could overcome its inefficiencies which had compelled it to seek rate increase.

The jury summoned Taylor, as the founder of the new management system, to witness to the lawyer’s claim. Taylor, in his testimony, explained the ins and outs of ‘Scientific Management’ and how it could increase efficiency in business operations. Taylor’s testimony was supported, at the courts, by a few well known business leaders namely J.M. Dodge, H.K. Hathaway, H.R. Towne and Harrington Emerson who already had adopted Taylor’s management system and had become highly cost efficient in their business operations. Emerson explained that, according to his estimates, the Eastern Rail Road could save one million dollars every day if Taylor’s scientific management was founded in it. His appeal promulgated the notion that scientific management was the magic-cure for the efficiency torn industrialists.

This one hundred year old ‘Eastern Rate Case’ has reincarnated at present in Sri Lanka along with the submission of an application by Ceylon Electricity Board to the Public Utilities Commission of Sri Lanka to increase the electricity tariff at a very high rate. Unlike in the 20th century America, no court cases were heard against the application for rate hike in 21st century Sri Lanka. Yet the Public Utilities Commission approved electricity tariff hike at an alarming rate which then invited numerous agitations and protests from the people. Despite the Opposition Party lawmakers accusing the management failure at Ceylon Electricity Board and appeal to correct its management practices through eliminating waste and corruption in order to bring down sky rocketing costs, the pro-government elements had drawn people in thousands to the streets in support of the decision to increase electricity tariff. This pro-tariff-hike parade endorsed the common mismanagement practices of the Electricity Board and empowered it to continue with those management evils.

Disregarding the management blunders of the Electricity Board claimed by the stakeholders and the inefficiencies emanated from them, the Public Utilities Commission approved tariff hike to the satisfaction of the client but to the dissatisfaction of the public. The Public Utilities Commission of Sri Lanka headed by Dr. Jayathissa de Costa did not take any trouble to question the management blunders of the Electricity Board before approving the rate hike. The responsibility of the Public Utilities Commission is to regulate the prices of utilities and the objective of price control on the other hand is to maintain right price and consumption stability. Thus it is a responsibility of the Commission to advise the Electricity Board to correct its management problems. The Commission neither has considered the negative chain reactions of the industrial sector to the tariff hike and erosion of the total consumption which ultimately would shrink the economy. Before long, the next Central Bank Quarterly would undoubtedly report drop in production, consumption, employment and economic growth in response to the electricity tariff hike.

The responsibility of the Public Utilities Commission has been elaborated in its Vision, Mission and Objectives. The Vision reads as “to create an environment for all inhabitants of Sri Lanka and the contributors to its development, to have access to essential infrastructure and utility services in the most economical manner within the boundaries of the sustainable development agenda of the country.” And the Mission is “to regulate all the utilities within the purview of the Public Utilities Commission of Sri Lanka to ensure safe, reliable and responsibly priced infrastructure services for existing as well as future consumers in the most equitable and sustainable manner.” The main objectives aim at “protecting interests of all consumers, promoting efficiency in both the operations of and capital investment in public utilities industries and promoting an efficient allocation of resources in public utilities industries.” The generously granted electricity rate hike by the Public Utilities Commission challenges its own vision, mission and objectives. Thus the purpose of existence of the Public Utilities Commission is lost!

Average consumers are not aware of the Eastern Rate case, Scientific Management or the Public Utilities Commission. Neither do they know Frederick Taylor or Jayathissa de Costa. But what they know is that their monthly electricity bill has doubled without increase in their electricity consumption and thus sizeable portion of their income has been siphoned off from their pockets for no responsibility they have assumed. Through granting approval for a massive tariff hike, the Public Utilities Commission has tolerated the mismanagement of the Electricity Board to persist. The inefficient public sector utility industries in the country can follow the mode of the Electricity Board and appeal for rate increases in the future. Is the Public Utilities Commission to blindly grant approval for their appeals too without proper assessment of management practices?

We anticipate that the Eastern Rate Case of 1910 in America would serve as precedence to the rate issues of Sri Lanka and that the public sector utility industries and the Public Utilities Commission would take a step back to learn from the hundred year old management of Taylor!

(Writer is the Professor of Management, University of Peradeniya)

Courtesy: Island, Sri Lanka

About these ads

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 54 other followers

%d bloggers like this: