that would be entirely satisfactory and, if expressed by a definite rule, would be as certain as if determined in dollars and cents. I will discuss that a little further, if I may, when I come to that question.

Mr. FERRIS. Is there anything in the bill-there is not, I assumethat authorizes the Federal Government to fix retail rates?

Mr. MERRILL. Only through the general powers that are given in here for rate regulation.

Mr. FERRIS. And those are given to whom under this bill? Mr. MERRILL. To the commission.

Mr. FERRIS. Then the commission can, under this bill-I have not the bill fresh in mind, because I have not read it recently-determine what retail rate the power companies shall charge?

Mr. MERRILL. The bill provides that the commission may regulate rates within a State, if the State has no rate-regulating authority of its own.

Mr. FERRIS. And in interstate service.

Mr. MERRILL. It can then regulate them just as a local public utility commission would regulate them.

Mr. FERRIS. There is no power fixing a sliding scale of royalty, and the royalty they pay at the start will be the royalty clear through the 50 years.

Mr. MERRILL. That is not necessarily so.

Mr. FERRIS. How is it under the bill?

Mr. MERRILL. The bill provides that the royalty shall be fixed in the license, and the royalty could be fixed in the license at 10, 20, or 30 cents per horsepower, for example, or it could be fixed as a percentage of earnings, or in some other manner.

Mr. FERRIS. Then it becomes a matter of contractual relation at the time he enters into it?

Mr. MERRILL. Yes.

The CHAIRMAN. Mr. Merrill, we will now take a recess until 2 o'clock, and you can then resume your statement.

AFTER RECESS.

(At the expiration of the recess the committee resumed its session.)

The CHAIRMAN. Mr. Merrill, you may proceed with your state

ment.

Mr. MERRILL. We were speaking when we stopped this morning on the term of the license.

The next important feature, and I think the most important feature of the legislation, is the provision concerning the price at which the properties may be taken over if the Government, at the end of the 50 years, exercises its right of recapture.

You will find that provision in section 3 among the definitions which precede the text of the bill.

The term which we have used is "net investment," and we have used this term and the definition which you find here with the purpose of fixing a fair basis of compensation from the standpoint both of the public who may exercise through its Government the right of purchase and the corporation whose properties may be taken over. In brief language, the price to be paid is to be the cost of the prop

erty, diminished by so much as the licensee may be able during the period of the license to write off his investment from earnings in excess of a fair return.

The net investment as so used eliminates entirely from the price to be paid any increases in value due to lands owned by the licensee and used in connection with the license, any increases in value due to its water rights over and above what it may have paid to the local authorities for them. That is, "unearned increment," so called, is completely excluded from the price to be paid. On the other hand, the licensee does not have the price for his properties reduced on account of accumulated depreciation except as he has been able, through the period of the license, to write off that depreciation out of earnings. In other words, it is a 100 per cent investment basis. Whatever money goes into a project of this kind has to come back from some source. It either has to come back in a capital sum or it has to come back in earnings. We provide that it shall come back, if the Government takes it over, as a capital sum reduced by the amount that has been retired through earnings. In my judgment, this is the fairest basis that could be employed from the standpoint of proper protection of the money that goes in, and from the standpoint of protecting the public as users of power and as rate payers from being obliged to pay more for the property at the termination than was actually and honestly put into it.

Mr. ESCH. You are using the terminology and also the regulations used by the Division of Valuation of the Interstate Commerce Commission?

Mr. MERRILL. Yes; and for this reason: Cost is a complicated item to define in technical language. It would take approximately two or three pages of text of the nature of this bill to be able to define in its proper technical and accounting terminology the word "cost" and to include the elements that go to make up cost. It was to avoid the use of a long definition, the terms of which might arouse controversy, that it seemed advisable for the United States to adopt through this legislation, and for the purpose named here, that definition of the word "cost" which the only recognized Federal agency, the Interstate Commerce Commission, has prescribed in its valuation for railroads. The definition refers only to that part of the classification which I have here, about five pages, that describes and defines what is meant by "cost." This definition would not include the classification of the commission as a classification of accounts. It has nothing whatever to do with that.

Mr. PARKER. On what page is that definition?

Mr. MERRILL. "Net investment," on page 6. This is the classification now in existence and being used by the Interstate Commerce Commission.

The CHAIRMAN. Mr. Merrill, would it not be a good idea for you to incorporate at this state of your hearing so much of that definition as may be applicable?

Mr. MERRILL. I will be very glad to do so.

GENERAL INSTRUCTIONS.

The carrier's records shall be kept with sufficient particularity to show fully the facts pertaining to all entries made in the accounts provided herein for investment in road and equipment. Where the full information is not recorded in the general books, the entries therein shall be supported by other records in

which the full details shall be shown. Such general book entries shall contain sufficient reference to the detail records to permit ready identification, and the detail records shall be filed in such manner as to be readily accessible for examination by representatives of the Interstate Commerce Commission.

1. ACCOUNTS FOR INVESTMENT IN ROAD AND EQUIPMENT.-The accounts prescribed in this classification are designed to show the investment of the carrier in property devoted to transportation service. The carrier's investment in physical property other than transportation property is provided for in balancesheet account No. 705, 'Miscellaneous physical property." The carrier means the accounting carrier, except when otherwise specifically indicated. The carrier's records shall be kept in such form that expenditures for additions and betterments may be reported separately from those for original road, original equipment, and road extensions, and shall show separately the expenditures under each authorized addition and betterment project. (See balance-sheet account No. 701, "Investment in road and equipment," and No. 702, “Improvements on leased railway property.")

2. ITEMS TO BE CHARGED.-To these accounts shall be charged the cost of original road, original equipment, road extensions, additions, and betterments; also the estimated values at time of acquisition of right of way and other road and equipment property donated to the carrier, except that unless authorized by the Commission no charges shall be made to these accounts after July 1, 1914, for donations received previously to that date. Applications to the commission for including such items in the road and equipment accounts shall contain full information concerning the source and character of the donations. If the total cost of additions and betterments to any class of equipment, or any class of fixed improvements (except tracks), under a general plan, considered as a whole, is less than $200, the option may be exercised of charging the amount expended to the appropriate account in operating expenses. This rule is not to be construed as authorizing the parceling of expenditures in order to bring them within this limit.

Construction includes all processes connected with the acquisition and construction of original road and equipment, road extensions, additions, and betterments.

Original road means the land and fixed improvements provided and arranged for in the original plan for the construction of a new road, When the acquisition of any such fixed improvements under the original plan is deferred, such improvements, when acquired, shall be considered as additions. Original road shall not be construed to include fixed improvements which, under the original plans for the road, it is proposed to substitute at some time subsequent to the beginning of commercial operations for the improvements originally installed and used for transportation operations, such as steel bridges substituted for trestles.

Original equipment means equipment provided and arranged for under the original plan for the construction of a new road. When the acquisition of such equipment under the original plan is deferred, such equipment, when acquired, shall be considered as additions.

Road extensions means the land and fixed improvements provided and arranged for in the original plan for the construction of extensions of existing main lines, additional branch lines, and extensions of existing branch lines. When the acquisition of any such fixed improvements under the original plan is deferred, such improvements, when acquired, shall be treated as additions. Road extensions shall not be construed to include fixed improvements which under the original plans for the extensions it is proposed to substitute at some time subsequent to the beginning of commercial operations for the improvements originally installed and used for transportation in connection with commercial operations, such as steel bridges substituted for trestles.

Equipment means the rolling stock, boats, highway vehicles, horses, and harness devoted to transportation service, the cost of which is includible in the equipment accounts.

Fixed improvements means structures which are fixed as to location, such as tunnels, bridges, buildings, earthworks, etc.

Additions are additional facilities, such as additional equipment, tracks (including timber and mine tracks), buildings, bridges, and other structures; additions to such facilities, such as extensions to tracks, buildings, and other structures; additional ties laid in existing tracks; and additional devices applied to facilities, such as air brakes applied to cars not previously thus equipped. When property, such as a section of road, track, unit of equip

ment, shop or power plant machine, building, or other structure, is retired from service and replaced with property of like purpose, the newly acquired property shall, for the purpose of this classification, be considered as an addition and the cost thereof accounted for accordingly. (See section 7.) If, however, the property retired and replaced is of minor importance, such as a small roadway building or other structure, and is replaced in kind without betterment, the cost of the replacement shall be charged to operating expenses and no adjustment made in the road and equipment accounts.

Betterments are improvements of existing facilities through the substitution of superior parts for inferior parts retired. such as the substitution of steeltired wheels for cast wheels under equipment, the application of heavier rail in tracks, and the strengthening of bridges by the substitution of heavier members. The cost chargeable to the accounts of this classification is the excess cost of new parts over the cost of current prices of new parts of the kind retired. (See section 12.)

Costs shall be actual money costs to the carrier. Where a portion of the funds expended by the carrier has been obtained through donations by States, municipalities, individuals, or others, no deductions on account of such donations shall be made in stating the costs. Contributions for joint expenditures should not be considered as donations. The carrier's proportion only of the cost of joint projects, such as construction of jointly owned tracks and elimination of highway crossings at joint expense, shall be included in these accounts.

3. BASIS OF CHARGES.-The charges to the accounts of this classification shall be based upon the cost of the property acquired. When the consideration given for the purchase or the improvement of property the cost of which is chargeable to the accounts of this classification is other than money, the money value of the consideration at the time of the transaction shall be charged to these accounts and the actual consideration shall be described in the record in sufficient detail to identify it. The carrier shall be prepared to furnish the commission upon demand the particulars of its determination of the actual cash value of the consideration, if other than money.

4. COST OF CONSTRUCTION.-It is intended that the accounts for fixed improvements and equipment shall include the cost of construction of such property. The cost of construction shall include the cost of labor, materials and supplies, work-train service, special machine service, transportation, contract work, protection from casualties, injuries and damages, privileges, and other analogous elements in connection with such work. The several items of cost here referred to are defined as follows:

(a) Cost of labor includes the amount paid for labor expended by the carrier's own employees, including the cost of labor expended for preliminary work, such as sinking test holes or making soundings for tunnels, grading, buildings, and other structures; and cost of labor expended in laying and taking up tracks for temporary use in construction, except the cost of labor expended on tracks provided for the protection of traffic during the progress of addition and betterment work. Office expenses and traveling and other personal expenses of employees, when borne by the carrier, shall be considered a part of the cost of the labor, as shall also the cost of fidelity bonds and employers' liability insurance premiums. When officers or employees are specially assigned to construction work, their pay and their traveling and incidental expenses while thus engaged shall be included in the cost of the work. No charge shall be made against road and equipment accounts for the pay of officers who merely render services Incidentally in connection with extensions, additions, or betterments, although traveling and incidental expenses incurred by such officers solely on account of such work shall be included in the account to which the cost of the work is chargeable.

(b) Cost of materials and supplies includes the purchase price of materials and supplies, including small tools, at the point of free delivery, plus the costs of inspection and loading assumed by the carrier; also a suitable proportion of store expenses. (See special instructions for operating expense accounts, sections 16 and 17.) In calculating the cost of materials used, proper allowance shall be made for the value of unused portions and of cuttings, turnings, borings, etc.; for the value of the material recovered from temporary tracks, scaffolding, cofferdams, and other temporary structures used in construction; and for the value of small tools recovered and used for other purposes.

(c) Cost of work-train service includes amounts paid to others for rent and maintenance of the equipment used; cost of labor of enginemen, trainmen, and

engine-house men, including the wages of engine crews and train crews held in readiness for such service; and the cost of fuel and other supplies consumed in connection with the operation of work trains. It shall also include the cost of maintaining the carrier's own equipment while used in construction service and a fair rent for such equipment while so used. Amounts charged for rent of such equipment used in construction shall concurrently be credited to the appropriate income account for hire of equipment. No "rent" or return upon the investment in such equipment shall be charged for the use of equipment acquired with the proceeds of securities sold, when the interest upon such securi ties is charged to the accounts of this classification.

(d) Cost of special machine service includes the cost of labor expended and of materials and supplies consumed in maintaining and operating steam shovels, scrapers, rail unloaders, ballast unloaders, pile drivers, dredges, ditchers, weed burners, and other labor-saving machines; also rents paid for use of such machines. (See Note A under account No. 37, "Roadway machines," and text of general account 11, Equipment, seventh paragraph.)

(e) Cost of transportation includes the amounts paid to other companies or individuals for the transportation of men, materials and supplies, special machine outfits, appliances, and tools in connection with construction. Freight charges paid foreign lines for the transportation of construction material to the carrier's line shall be included, so far as practicable, as a part of the cost of the material, when such charges are borne by the carrier. A fair allowance representing the expense to the carrier of such transportation in transportation service trains over the carrier's own line also shall be included. When the cost of such transportation is not assignable to specific work, it shall be included in account No. 43, Other expenditures-Road." Amounts thus charged for transportation in transportation service trains over the carrier's line shall be credited to operating expense general account VIII, Transportation for Investment-Cr. (f) Cost of contract work includes amounts paid for work performed under contract by other companies, firms, or individuals, and costs incident to the award of the contract.

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(g) Cost of protection from casualties includes expenditures for protection against fire, such as payments for discovery or extinguishment of fires, cost of detecting and prosecuting incendiaries, witness fees in relation thereto, amounts paid to municipal corporations and others for fire protection, and other analogous items of expenditure in connection with construction work. (h) Cost of injuries and damages includes expenditures on account of injuries to persons or damage to property when incident to construction projects, and shall be included in the cost of the work in connection with which the injury or damage occurs. It also includes that portion of premiums paid for insuring property applicable to the period prior to the completion or coming into service of the property insured. Insurance recovered on account of compensation paid for injuries to persons incident to construction shall be credited to the accounts to which such compensation is charged, and insurance recovered on account of damages to property incident to construction shall be credited to the accounts chargeable with the expenditures necessary for restoring the damaged property. The cost of injuries and damages incident to the removal of old structures, or parts thereof, shall be charged to Operating Expenses or Profit and Loss, as may be appropriate, except that such costs in connection with the removal of old structures which are incumbrances on newly acquired lands shall be included in account No. 2, "Land for transportation purposes,' or No. 3, "Grading,” as may be appropriate. (See sections 7 and S.)

(i) Cost of privileges includes compensation for temporary privileges, such as the use of public property or streets, in connection with the construction of the property of the carrier.

5. EXCAVATED MATERIAL.-The cost of disposing of material excavated in connection with construction shal! be considered as a part of the cost of the work, except that when such material is used for filling, the cost of removal and dumping shall be equitably apportioned between the work in connection with which the removal occurs and the work in connection with which the material is used.

6. ITEMS TO BE CREDITED.-To these accounts shall be credited the ledger value of property retired.

Ledger value of property is the value at which the property is carried in the property investment account in the general ledger of the carrier. In case the value of any item of property is not shown separately in the ledger the ledger