Regulation of the stock and bond issues . . . has worked to the benefit of the corporations themselves, in that it is made easier to obtain money for extensions and improvements. Commissioner Halford Erickson [Wisconsin] said recently, "We know from experience that investors often attach a great deal of importance to governmental regulation of securities. . . . In fact, investors often buy securities on the strength of the existence of such regulation alone, without inquiring into its character and scope." "

It is evident, however, that grave danger lies in such a blind confidence on the part of the investors. The enacting laws usually state that such regulation may not be construed as a guarantee that the stocks and bonds issued are a good investment. The commission is under a duty to protect the investor from blue-sky sales and excessive flotations, but it cannot be held responsible for errors in judgment or for unforeseen circumstances which might make the securities worthless. This also applies to the recent blue-sky laws. In fact the power of these commissions is much less than the average investor supposes; for, as a rule-except in New York-the commission cannot refuse to grant a certificate for new issues if the provisions of the law have been complied with. In other words, it cannot pass upon the social necessity of the purpose for which the income from the stocks and bonds will be used; It can only determine how great an issue will be needed for the purpose proposed by the corporation, based on the estimated earnings of the new enterprise. This fact was well brought out in a decision of the Wisconsin Commission in regard to a petition of the Southern Wisconsin Railroad Company. The petitioner wished to issue $300,000 of bonds for (1) renewal of equipment, (2) extension of lines, (3) erection of a power plant and (4) payment of its floating debt. The commission did not wish to issue the certificate, but held that under the law it was required to do so; for the company had "complied with all the requirements . . . by furnishing such statements and evidence as the commission deemed pertinent

2

166 Workings of the Wisconsin Commission," Public Service, April, 1912, p. 130. Report of 1907–8, vol. ii.

to the inquiry." In Minnesota the court declared unconstitutional a statute giving power to grant or refuse a bond issue at will as an attempt to delegate legislative powers.'

In New York alone is this condition remedied; not, it is true, by allowing a free decision on the part of the public service commission, but by an inclusion in the law of a detailed statement of purposes for which issues can be made. The commis

sion may refuse all petitions that are not within the scope of these provisions. For example, in 1909 in the second district, applications were refused for issue of scrip dividends, capital stock and bonds for the reimbursement of the treasury, on the ground that these purposes were not provided for in the original law.

A new departure such as this, creating new conditions, often by its logical development makes necessary a new governmental policy. When a commission determines that the investment will "provide for a fair return on the stocks, bonds and other securities offered for sale," it is in some measure, although not legally, bound to protect the company against competing enterprises whose presence in the field may diminish the returns on the original investment. This view of the question is new. Its significance has been realized in full only in New York; but in Wisconsin it has been recognized in part.. In the former state all railroads and public utility companies must obtain from the commission a certificate of "public convenience and necessity" before entering upon any new construction, whether it be an extension of an existing plant or the erection of a new plant. In Wisconsin a similar certificate must be obtained by all common carriers. In this case it is entirely at the option of the commission to grant or refuse application, and this certificate is in no way connected with the certificate authorizing any new security issue that may be needed to build the extension or new plant. In both states, if the field is already occupied by a company of adequate capacity, the commissions have refused to allow a competitor to enter. Some of

1 State v. Great Northern Railroad, 111 N. W. 289.

Kansas House Bill No. 906 (Session 1911). In Kansas, securities are passed upon by the bank commissioner of the state.

the Wisconsin decisions are most interesting, showing as they do the frank recognition of monopoly as the best condition for public utility service.

Railroads are generally natural monopolies and the unnecessary paralleling of lines only results in the end in consolidation or arrangements whereby the public benefits of competition . . yield to the inevitable increase in the cost of transportation made necessary by the cost of operating and maintaining two railways where one is adequate. .

It is well understood that the theory of the law is that utility enterprises are generally monopolistic in their character. . . It was one of the purposes of the statute to insure the public against the undertaking of unusually hazardous enterprises. It was doubtless contemplated to prevent the projection of lines for speculative purposes and through which the innocent purchaser would be made to suffer losses. . .3

The legislature doubtless intended that through the administration of this law, destructive competition and rate wars . . . should be prevented.'

The Milwaukee and Fox River Valley Railway Company petitioned for a certificate of public convenience and necessity for an interurban railway. The commission granted the certificate with the decision: "While the project involves many uncertainties, these uncertainties do not create a risk of such magnitude as to justify the commission in denying promoters and investors the privilege of assuming it. . ."5 The territory to be covered by this company was already practically entirely served by the Milwaukee Northern Railway, and the decision is therefore interesting as showing that the commission will allow competition where it believes there is business enough for two. The opinion went on to say, however, that there would be no rate-cutting or destructive competition in this instance, because the commission has the power to fix rates.

1 Report of the Wisconsin Railroad Commission, vol. iii (1908–9), p. 289.

2 Ibid. vol. iv (1909-10), p. 60.

3 Ibid. vol. v (1910), p. 473.

• Ibid. p. 475.

5 Ibid. Decision, Milwaukee and Fox River Valley Railway Co.

• Some states, far from recognizing the monopolistic character of public utilities, have attempted to maintain competition among them. For example, Missouri has a statute preventing any railroad from owning, controlling, or operating a parallel or competing line. Section 41 of the Oklahoma state constitution prohibits public ser

I

One noteworthy fact in connection with this problem is that in Wisconsin the "public convenience and necessity" idea does not extend to telephone companies. "These alone are left in a class by themselves, supposed to be governed by the ordinary laws of competition." No explanation for this exception is offered either by the commission or by the original law. It is also to be noted that there is a possible appeal from the commission's decision to the circuit court of Dane county, and from there to the state supreme court.

In New York the principle above outlined is definitely extended to all public-utilities companies. One example will suffice to illustrate the principle upheld. The Hudson River Electric Company petitioned for permission to exercise rights granted them by a franchise issued by South Glens Falls to light the streets of that village. The public service commission decided:

The village of South Glens Falls is now being served and has for years last passed been served with the electric light of the United Gas, Electric Light & Fuel Company of Sandy Hill and Fort Edward, N. Y. . . . The said company has a plant sufficiently adequate to supply proper service to the said village . . . and no reason exists why the applicant should be allowed to light therein.'

The commission then ordered the existing company to furnish. light at the rate proposed by the applicant.

In another decision of the New York commission a further development is seen. When the North Shore Electric Light and Power Company asked for permission to furnish power in a territory already served by the Port Jefferson Electric Light Company, it was shown that the latter's service was inadequate, that the plant needed improvements and additions, that vice corporations from holding or controlling in any manner whatever the stock of any competitive corporation engaged in the same kind of business. In the light of the Wisconsin and New York attitude on this question, it would seem best to allow rate-regulated competition if the field can afford business enough for two, but to prohibit in the first place the construction of the competitor if the field is clearly inadequate to provide fair profits for a duplicate equipment.

1 Report of the Wisconsin Railroad Commission, vol. iv (1909–10), p. 60.

2

* Report of the New York Public Service Commission (2nd dist.), 1909, vol. i, p. 660.

rates were discriminatory, and that the business methods were lax. The commission denied the application, provided the Port Jefferson Company present within ten days a resolution of the board of directors promising without complaint to obey any order of the commission within six months from date, requiring additions, improvements etc. The company furnished the resolution requested and the application of the competitor was refused. In a similar case decided some time previous, the recommendations of the commission following the refusal of the competitor's application amounted to a practical renewal of the entire plant and equipment as well as a reorganization of the company's whole business system.

Thus in states existing side by side we may outline the evolution of commission regulation: (1) states without a railroad or public utilities commission of any sort (six); (2) states having power to enforce changes in service, rates and equipment (twenty-eight); (3) states that may regulate security issues for new enterprises but may not pass upon the social necessity of the undertaking for which they are issued (eleven); (4) one state that may in addition determine whether public convenience or necessity demands the new project, if the applicant is a common carrier (Wisconsin); (5) one state that may apply this test to all public utilities, and use the power to grant or refuse such a certificate as a whip to compel adequate service from the resident company (New York).

Blue-sky legislation applies to all companies the principle evolved as a middle step in public utility regulation. It will be interesting to see whether other steps of this series are ever given a universal application, whether a commission be given power to fix prices and regulate the output of industries (as was indeed suggested in the last presidential campaign), and whether the monopoly principle be recognized here too as in the case of public utilities.

Coatesville, PA.

ARTHUR U. AYRES.

1 Report of the New York Public Service Commission (2nd dist.), 1910, vol. i, pp. 782, 783.