their investment. It made the city and the company partners in their transportation system. It gave the city what will eventually be a substantial interest in the properties of the company. It insured a large measure of control by the city officials over certain features of the management of the company. It made provision for the future growth of the system by the construction of additional lines. It also reserved to the city the right to acquire a property which in 1957 will be enormously valuable, at a price which is reasonably certain to represent but a portion of its value.

New York City has gone still further in the harmonizing of the relations between the city and the public-service corporation. New York has worked out a plan for utilizing the credit of the city in the construction of subway lines for which private capital could not be secured on advantageous terms. In the case of the original subway, the city furnished all the money for construction. Large extensions of this system are now in progress, which will be paid for in part by the companies and in part with public money. The leases and contracts under which the city furnishes this money are made on terms which provide for the payment of interest on the city

bonds issued to provide these funds, plus a sinking fund. The right of purchase at the end of a term of years is reserved. They represent the furthest development in the coöperation between the city and the municipality.

The rights of the public either to own their transportation system or to retain the reserved interest, and, in the meantime, to share in the profits; to supervise, in so far as is necessary to secure good service, construction and operation; and to regulate the capitalization to prevent inflation, are now established. In return, the public has come to recognize its obligation to protect the companies in the enjoyment of liberal franchise privileges for a fixed term of years, to secure adequate compensation for all their outlay of capital; and, at the end of the franchise period, in case it is not deemed wise to extend these privileges, to pay to the company a fair compensation for the property. Finally, if New York is to be taken as the most advanced type of municipal coöperation with public-service corporations it is now recognized as a proper function of municipal government, to provide, by the use of the public credit, for the construction of subway lines, which are then to be turned over for operation to private

corporations. The public-service corporations, in their turn, have not only recognized the right of the people to ownership and control, but also to share in the profits of operation.

Ten years ago there was much talk of municipal ownership and operation of public utilities as the only escape from a situation which, all agreed, was fast becoming intolerable. To-day, while municipal ownership, actual or reserved, is now accepted without question, the talk of municipal operation has entirely disappeared. The American city and the public-service corporation have entered into a partnership for mutual advantage. As a result of this partnership, the position of public-service corporations before the public and with the investor has been much improved.

XV

THE PUBLIC-SERVICE COMMISSION AND THE INVESTOR1

We have examined the methods employed by the investment-banker in investigating the securities of public-service corporations. We saw with what great care these investigations are made, and with what searching scrutiny every factor bearing upon the merits of the enterprise is considered. As a result of these careful examinations, the number of failures among public-utility corporations is each year diminishing, and the investor can buy these securities with confidence.

Supplementing the work of the investmentbanker, although undertaken with a different motive, many States have established administrative bodies known as Public-Service Commissions, who are charged with the duty of supervising the rates and prices, the service, and, incidentally, the capitalization, accounting methods, and financial policy of public-service corporations. The primary

1NOTE.-This chapter is substantially identical with Chapter VI in the author's Corporation Finance.

object in the establishment of these commissions has been to protect the public against bad service and excessive rates and prices.

In order to make sure that corporations subject to their jurisdiction are honestly capitalized, so that they may not have any inducement unduly to advance rates in order to pay interest and dividends on capitalization representing no actual value, and in order that the proceeds of their sales of stock and bonds should be applied to the improvement of their plant and to the consequent betterment of their service, some of the Publicservice Commission laws clothe the commissions with authority over the issue of securities.

The nature of this power over security issues is indicated by the following extract from the Act Creating the Public-Service Commissions of New York:

Any common carrier, railroad corporation or street railroad corporation organized under the laws of the State of New York, may issue bonds, stocks, notes or other evidences 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 or lawful refunding of its obligations, 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 that, in the opinion of the commission, the