or telegraph companies or other common carriers, of free passes or franks to their employes, officers, agents, surgeons, physicians, attorneys at law, and their families, and the interchange between said public utilities and common carriers, of passes or franks for their employes, officers, agents, surgeons, physicians, attorneys at law, and their families.

42. If, for any reason, any section or provision of this act shall be questioned in any court, and shall be held to be unconstitutional or invalid, no other section or provision of this act shall be affected thereby.

43. All acts or parts of acts inconsistent herewith are hereby repealed, and this act shall take effect on the first day of May, Anno Domini one thousand nine hundred and eleven.

Approved April 21, 1911.

APPROVAL OF ISSUES OF STOCKS, BONDS AND OTHER FORMS OF INDEBTEDNESS.1

A common carrier, railroad corporation or street railroad corporation organized or existing, or hereafter incorporated, under or by virtue of the laws of the State of New York, may issue stocks, bonds, notes or other evidence of indebtedness payable at periods of more than twelve months after the date thereof, when necessary for the acquisition of property, the construction, completion, extension or improvement of its facilities, or for the improvement or maintenance of its service or for the discharge of lawful refunding of its obligations or for the reimbursement of moneys actually expended from income, or from any other moneys in the treasury of the corporation not secured by or obtained from the issue of stocks, bonds, notes or other evidence of indebtedness of such corporation, within five years next prior to the filing of an application with the proper commission for the required authorization, for any of the aforesaid purposes except maintenance of service and except replacements in cases where the applicant shall have kept its accounts and vouchers of such expenditure in such manner as to enable the commission to ascertain the amount of moneys so expended and the purposes for which such expenditure was made; provided and not otherwise that there shall have been secured from the proper commission an order authorizing such issue, and the amount thereof and stating the purposes to which the issue or proceeds thereof are to be applied, and that, in the opinion of the commission, the money, property or labor to be procured or paid for by the issue of such stock, bonds, notes or other evidence of indebtedness is or has been reasonably required for the purposes specified in the order, and that except as otherwise permitted in the order in the case of bonds, notes, and other evidence of indebtedness, such purposes are not, in whole or in part, reasonably chargeable to operating expenses or to income.

1 The Public Service Commissions Law of New York, Section 55.

INTERPRETATION OF SECURITY RESTRICTIONS.

General Principles Regulating Action by the Board of Public Utility Commissioners Upon Petitions Asking Approval of Proposed Issues of Securities.1

The law at present casts upon this board the responsibility of determining what security issues may be made by public utilities in New Jersey (Chapter 195, III, 18(e), Laws of 1911). The board after due hearing is required to approve proposed security issues, provided the board approve the purpose of said proposed issues.

Conspicuous among the legal requirements to be met by proposed issues are those embodied in Chapter 331 of the Laws of 1906. This Act, inter alia, forbids the issue, sale or delivery of bonds, notes or obligations of any character by public untilities, except for cash or property of an actual cash value of at least 80 per cent. of the face value of the securities. The Act also forbids the issue, sale or delivery of public untilities of capital stock except for cash or property of actual cash value at least equal to the par value of the stock.

So far as the board's approval of the purpose of a proposed security issue is concerned, the board is already on record to the following effect:

"The term 'purpose,' in the opinion of the Board, cannot and ought not narrowly to be confined merely to the corporation's intention to procure or pay for property, materials and services with the proceeds of the securities intended to be issued. The powers and responsibilities of the Board in this respect are no less ample than may fairly be inferred from the spacious term 'purpose' advisedly incorporated in the statute." (Memorandum dated July 7, 1911. In the Matter of the Application of the Riverside Traction Company for Leave to Issue, Sell and Deliver Bonds, etc.)

Various cases involving the approval of proposed security issues have been acted upon by the board under the law. An analysis of many of these cases discloses certain general principles upon which these applications should be determined. These general principles will control unless and until good reason can be shown for departing therefrom. For the information of public utilities petitioning or intending to petition for the approval of security issues, certain of these general principles are set forth as follows:

1. The two conditions first named above must, in all cases, be met. These are that a proposed issue must be in accordance with

1 Conference Order No. 7 and Conference Ruling No. 13 of the New Jersey Board.

the law, and that the purpose of a proposed issue must be approved by the board.

2. The purpose of a proposed issue is not commendable and will not carry the board's approval where the issue, if approved, would result in an invasion of mandatory statutory provisions governing the issue, sale and delivery of securities. Thus, where bonds have been used by the issuing public utility as collateral security for loans to an amount of less than 80 per cent. of the face value of the bonds, and where such a condition still holds, the board has decided adversely to subsequent security issues prayed for by such public utilities. Such refusal is based on the ground that such subsequent approval would be to connive at an attempt to circumvent the provision and intent of Chapter 331 of the Laws of 1906. (See memorandum dated July 7, 1911. In the Matter of the Application of the Riverside Traction Company for Leave to Issue, Sell and Deliver Bonds, etc.)

The "purpose" of an intended security issue is held to be vitiated, if a result of said issue, if approved, would enable the company to evade mandatory legal provisions. Thus, in the case of the Riverside Traction Company cited immediately supra, the purpose of a proposed bond issue was held vitiated by the fact that said bond. issue, if approved, would defer for a time, or indefinitely postpone, an assessment for an unpaid percentage of the face value of the stock issued and outstanding.

3. Where approval of security issues is asked, and statement is made of the use to which proposed securities are to be put, the board endeavors through its inspectors to determine that the proceeds of the securities whose issue is asked shall be reasonably commensurate with the property or services to be purchased therewith. Where the property whose acquisition is sought can be inventoried and appraised, such a course is followed with as much care and in such detail as under all the circumstances is possible. Where the property or services to be acquired cannot be physically inventoried, because not yet existent, such estimate is made on the basis of unit prices and otherwise, with such care and in such detail as is possible under all the circumstances.

The board has already called public attention to what is implied by its approval of proposed security issues. This it did by a statement dated May 26, 1911, entitled "In the Matter of Certain Published Statements Made in Connection with the Offering for Sale of Public Utility Securities Issued Under the Laws of This State." In this statement it is said: "Nor does such approval by this board of such proposed issue of securities carry or imply any confirmation of the

business or financial standing of the issuing corporation as a whole." It must be recognized that no care exercised in the way of approval by the board at the time securities are issued can preclude the subsequent chance of poor management, dishonesty or ill-fortune, by which the assets of a public utility may be lessened or impaired. The intent of the statute and the board's action thereunder seek to preclude reckless and irresponsible promotion or subsequent inflated issues. No statute and no administrative process, however, can relieve the investor of the obligations of prudence and vigilance. At best they can but aid him in furnishing some grounds for the exercise of intelligent judgment.

4. Where petition is made for the approval of the issue of bonds or notes, where said bonds or notes are to be sold at a discount, the board has adopted the general policy of approving such issues only upon the companies undertaking to authorize the bond discount in accordance with certain stipulations inserted in the board's certificate of approval. Where, for example, a 5 per cent. bond is sold at 80 per cent. of its face value, the result of the sale of a thousanddollar bond is as follows: First, an increase of the company's liabilities to the amount of $1,000; second, an increase of the company's assets to the amount of cash realized of $800. The difference is commonly entered as an asset of $200 termed bond discount., This asset is practically a dummy asset. If the company is to make its real assets equal to its added liabilities, it must add to its property an amount equal to $200. The most effectual way would seem to be to lay aside from earnings a small amount annually. The setting aside of this amount annually must be done before the company is entitled to declare or make any dividend. It is true that the process implies that the consumer must contribute in rates more than he would be required to pay if no amount were needed annually for this amortization. On the other hand, if the bond has been sold at par, a higher rate than the assumed 5 per cent. would have been exacted by the lender to the company, and this higher rate of interest would have been included in the annual fixed charges. The higher fixed charges would have imposed a greater annual payment upon consumers. Practically, therefore the burden which amortization imposes on the consumer is simply the necessary outcome of the process of issuing bonds at less than par. It would not disappear, but only change its form, if the bond were sold at par, and the real rate of interest thereon were not disguised.

It has been progressively acknowledged that bond discount is not properly chargeable to capital account, but should be amortized within the life of the obligation. In certain authorizations of bond issues